UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2019June 28, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from ______to_______
Commission file number 1-183

hsy-20200628_g1.jpg
THE HERSHEY COMPANYCOMPANY
(Exact name of registrant as specified in its charter)
Delaware23-0691590
(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)
(
offices and Zip Code)
(717) (717) 534-4200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, one dollar par valueHSYNew York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨

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 growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerxAccelerated 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

Indicate the number of shares outstanding of each of the issuer’sregistrant’s classes of common stock, as of the latest practicable date.
Common Stock, one dollar par value—148,307,602147,408,714 shares, as of October 18, 2019.July 17, 2020.
Class B Common Stock, one dollar par value—60,613,777 shares, as of October 18, 2019.July 17, 2020.





THE HERSHEY COMPANY
Quarterly Report on Form 10-Q
For the Period Ended September 29, 2019June 28, 2020

TABLE OF CONTENTS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 6. Exhibits


The Hershey Company | Q2 2020 Form 10-Q | Page 1





PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended Nine Months EndedThree Months EndedSix Months Ended
 September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Net sales $2,134,422
 $2,079,593
 $5,918,127
 $5,803,167
Net sales$1,707,329  $1,767,217  $3,744,646  $3,783,705  
Cost of sales 1,191,104
 1,216,100
 3,207,561
 3,172,194
Cost of sales914,777  892,473  2,085,472  2,016,457  
Gross profit 943,318
 863,493
 2,710,566
 2,630,973
Gross profit792,552  874,744  1,659,174  1,767,248  
Selling, marketing and administrative expense 481,363
 453,921
 1,388,729
 1,388,793
Selling, marketing and administrative expense408,949  453,793  884,333  907,366  
Long-lived asset impairment charges 
 1,649
 4,741
 28,817
Long-lived asset impairment charges1,600  4,741  9,143  4,741  
Business realignment costs 1,140
 1,660
 7,342
 10,864
Business realignment (benefits) costsBusiness realignment (benefits) costs(1,370) 6,140  (475) 6,202  
Operating profit 460,815
 406,263
 1,309,754
 1,202,499
Operating profit383,373  410,070  766,173  848,939  
Interest expense, net 35,456
 36,916
 106,690
 101,207
Interest expense, net38,079  33,776  74,334  71,234  
Other (income) expense, net 17,999
 12,493
 36,601
 35,201
Other (income) expense, net11,217  13,125  22,750  18,602  
Income before income taxes 407,360
 356,854
 1,166,463
 1,066,091
Income before income taxes334,077  363,169  669,089  759,103  
Provision for income taxes 82,178
 91,441
 224,129
 226,640
Provision for income taxes66,035  49,898  132,264  141,951  
Net income including noncontrolling interest 325,182
 265,413
 942,334
 839,451
Net income including noncontrolling interest268,042  313,271  536,825  617,152  
Less: Net (loss) income attributable to noncontrolling interest (125) 1,700
 (171) (1,320)Less: Net (loss) income attributable to noncontrolling interest(859) 431  (3,213) (46) 
Net income attributable to The Hershey Company $325,307
 $263,713
 $942,505
 $840,771
Net income attributable to The Hershey Company$268,901  $312,840  $540,038  $617,198  
        
Net income per share—basic:        Net income per share—basic:
Common stock $1.59
 $1.29
 $4.62
 $4.11
Common stock$1.33  $1.54  $2.66  $3.03  
Class B common stock $1.45
 $1.17
 $4.19
 $3.74
Class B common stock$1.21  $1.39  $2.41  $2.75  
        
Net income per share—diluted:        Net income per share—diluted:
Common stock $1.54
 $1.25
 $4.47
 $3.99
Common stock$1.29  $1.48  $2.58  $2.93  
Class B common stock $1.44
 $1.17
 $4.18
 $3.73
Class B common stock$1.20  $1.38  $2.41  $2.74  
        
Dividends paid per share:        Dividends paid per share:
Common stock $0.773
 $0.722
 $2.217
 $2.034
Common stock$0.773  $0.722  $1.546  $1.444  
Class B common stock $0.702
 $0.656
 $2.014
 $1.848
Class B common stock$0.702  $0.656  $1.404  $1.312  

See Notes to Unaudited Consolidated Financial Statements.

The Hershey Company | Q2 2020 Form 10-Q | Page 2




THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

For the three months endedFor the six months ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Pre-Tax AmountTax (Expense) BenefitAfter-Tax AmountPre-Tax AmountTax (Expense) BenefitAfter-Tax AmountPre-Tax AmountTax (Expense) BenefitAfter-Tax AmountPre-Tax AmountTax (Expense) BenefitAfter-Tax Amount
Net income including noncontrolling interest$268,042  $313,271  $536,825  $617,152  
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments:
Foreign currency translation gains (losses) during period$3,052  $—  3,052  $7,651  $—  7,651  $(48,292) $—  (48,292) $11,079  $—  11,079  
Pension and post-retirement benefit plans:
Net actuarial (loss) gain and prior service cost(16,685) 3,954  (12,731) —  —  —  (16,685) 3,954  (12,731) —  —  —  
Reclassification to earnings8,542  (2,183) 6,359  6,720  (1,773) 4,947  13,297  (2,731) 10,566  13,438  (3,580) 9,858  
Cash flow hedges:
Gains (losses) on cash flow hedging derivatives675  838  1,513  (2,547) 1,130  (1,417) 6,056  (268) 5,788  (3,336) 1,848  (1,488) 
Reclassification to earnings1,205  (817) 388  1,395  (885) 510  3,297  (1,930) 1,367  2,833  (1,776) 1,057  
Total other comprehensive (loss) income, net of tax$(3,211) $1,792  (1,419) $13,219  $(1,528) 11,691  $(42,327) $(975) (43,302) $24,014  $(3,508) 20,506  
Total comprehensive income including noncontrolling interest$266,623  $324,962  $493,523  $637,658  
Comprehensive (loss) income attributable to noncontrolling interest(826) 338  (3,288) 416  
Comprehensive income attributable to The Hershey Company$267,449  $324,624  $496,811  $637,242  
  For the three months ended For the nine months ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
  Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount
Net income including noncontrolling interest     $325,182
     $265,413
     $942,334
     $839,451
Other comprehensive income (loss), net of tax:                        
Foreign currency translation adjustments:                        
Foreign currency translation gains (losses) during period $(7,604) $
 (7,604) $5,365
 $
 5,365
 $3,475
 $
 3,475
 $(18,314) $
 (18,314)
Reclassification to earnings due to the sale of businesses 
 
 
 25,131
 
 25,131
 
 
 
 25,131
 
 25,131
Pension and post-retirement benefit plans:                        
Net actuarial gain (loss) and prior service cost 10,020
 (2,465) 7,555
 (7,574) 1,871
 (5,703) 10,020
 (2,465) 7,555
 (7,574) 1,871
 (5,703)
Reclassification of tax effects relating to U.S. tax reform 
 
 
 
 
 
 
 
 
 
 (36,535) (36,535)
Reclassification to earnings 11,537
 (2,755) 8,782
 12,082
 (3,170) 8,912
 24,975
 (6,335) 18,640
 22,273
 (5,302) 16,971
Cash flow hedges:                        
Gains (losses) on cash flow hedging derivatives 1,045
 (521) 524
 (1,484) 1,207
 (277) (2,291) 1,327
 (964) 6,320
 (256) 6,064
Reclassification of tax effects relating to U.S. tax reform 
 
 
 
 
 
 
 
 
 
 (11,121) (11,121)
Reclassification to earnings 3,331
 (400) 2,931
 (2,261) (479) (2,740) 6,164
 (2,176) 3,988
 2,462
 (1,674) 788
Total other comprehensive income (loss), net of tax $18,329
 $(6,141) 12,188
 $31,259
 $(571) 30,688
 $42,343
 $(9,649) 32,694
 $30,298
 $(53,017) (22,719)
Total comprehensive income including noncontrolling interest     $337,370
     $296,101
     $975,028
     $816,732
Comprehensive (loss) income attributable to noncontrolling interest     (532)     497
     (116)     (1,857)
Comprehensive income attributable to The Hershey Company     $337,902
     $295,604
     $975,144
     $818,589
                         

See Notes to Unaudited Consolidated Financial Statements.


The Hershey Company | Q2 2020 Form 10-Q | Page 3
4




THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 28, 2020December 31, 2019
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$1,165,331  $493,262  
Accounts receivable—trade, net540,398  568,509  
Inventories999,380  815,251  
Prepaid expenses and other197,835  240,080  
Total current assets2,902,944  2,117,102  
Property, plant and equipment, net2,165,346  2,153,139  
Goodwill1,979,002  1,985,955  
Other intangibles1,314,332  1,341,166  
Other assets524,687  512,000  
Deferred income taxes24,760  31,033  
Total assets$8,911,071  $8,140,395  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$530,042  $550,828  
Accrued liabilities643,938  702,372  
Accrued income taxes54,091  19,921  
Short-term debt198,299  32,282  
Current portion of long-term debt788,448  703,390  
Total current liabilities2,214,818  2,008,793  
Long-term debt4,091,211  3,530,813  
Other long-term liabilities643,847  655,777  
Deferred income taxes205,106  200,018  
Total liabilities7,154,982  6,395,401  
Stockholders’ equity:
The Hershey Company stockholders’ equity
Preferred stock, shares issued: NaN in 2020 and 2019—  —  
Common stock, shares issued: 160,939,248 at June 28, 2020 and December 31, 2019160,939  160,939  
Class B common stock, shares issued: 60,613,777 at June 28, 2020 and December 31, 201960,614  60,614  
Additional paid-in capital1,161,878  1,142,210  
Retained earnings1,516,543  1,290,461  
Treasury—common stock shares, at cost: 13,570,656 at June 28, 2020 and 12,723,592 at December 31, 2019(779,176) (591,036) 
Accumulated other comprehensive loss(367,193) (323,966) 
Total—The Hershey Company stockholders’ equity1,753,605  1,739,222  
Noncontrolling interest in subsidiary2,484  5,772  
Total stockholders’ equity1,756,089  1,744,994  
Total liabilities and stockholders’ equity$8,911,071  $8,140,395  
  September 29, 2019 December 31, 2018
  (unaudited)  
ASSETS    
Current assets:    
Cash and cash equivalents $302,636
 $587,998
Accounts receivable—trade, net 849,218
 594,145
Inventories 969,071
 784,879
Prepaid expenses and other 254,130
 272,159
Total current assets 2,375,055
 2,239,181
Property, plant and equipment, net 2,099,985
 2,130,294
Goodwill 1,982,362
 1,801,103
Other intangibles 1,452,726
 1,278,292
Other assets 524,323
 252,984
Deferred income taxes 29,809
 1,166
Total assets $8,464,260
 $7,703,020
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Current liabilities:    
Accounts payable $553,561
 $502,314
Accrued liabilities 726,344
 679,163
Accrued income taxes 74,085
 33,773
Short-term debt 1,275,430
 1,197,929
Current portion of long-term debt 352,954
 5,387
Total current liabilities 2,982,374
 2,418,566
Long-term debt 2,892,296
 3,254,280
Other long-term liabilities 627,842
 446,048
Deferred income taxes 200,157
 176,860
Total liabilities 6,702,669
 6,295,754
     
Stockholders’ equity:    
The Hershey Company stockholders’ equity    
Preferred stock, shares issued: none in 2019 and 2018 
 
Common stock, shares issued: 299,287,967 at September 29, 2019 and December 31, 2018 299,287
 299,287
Class B common stock, shares issued: 60,613,777 at September 29, 2019 and December 31, 2018 60,614
 60,614
Additional paid-in capital 1,130,493
 982,205
Retained earnings 7,525,653
 7,032,020
Treasury—common stock shares, at cost: 150,681,543 at September 29, 2019 and 150,172,840 at December 31, 2018 (6,938,744) (6,618,625)
Accumulated other comprehensive loss (324,141) (356,780)
Total—The Hershey Company stockholders’ equity 1,753,162
 1,398,721
Noncontrolling interest in subsidiary 8,429
 8,545
Total stockholders’ equity 1,761,591
 1,407,266
Total liabilities and stockholders’ equity $8,464,260
 $7,703,020

See Notes to Unaudited Consolidated Financial Statements.


The Hershey Company | Q2 2020 Form 10-Q | Page 4
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THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 28, 2020June 30, 2019
Operating Activities
Net income including noncontrolling interest$536,825  $617,152  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization142,524  144,346  
Stock-based compensation expense25,490  23,712  
Deferred income taxes3,309  8,783  
Impairment of long-lived assets (see Note 6)
9,143  4,741  
Write-down of equity investments18,550  9,785  
Other27,311  24,117  
Changes in assets and liabilities, net of business acquisitions and divestitures:
Accounts receivable—trade, net11,794  55,399  
Inventories(194,396) (173,074) 
Prepaid expenses and other current assets15,730  18,175  
Accounts payable and accrued liabilities(19,304) (33,797) 
Accrued income taxes65,169  (15,499) 
Contributions to pension and other benefit plans(8,333) (8,919) 
Other assets and liabilities(19,765) 4,407  
Net cash provided by operating activities614,047  679,328  
Investing Activities
Capital additions (including software)(185,784) (176,270) 
Equity investments in tax credit qualifying partnerships(26,392) (30,270) 
Other investing activities2,374  154  
Net cash used in investing activities(209,802) (206,386) 
Financing Activities
Net increase (decrease) in short-term debt166,017  (311,183) 
Long-term borrowings, net of debt issuance costs989,876  5,020  
Repayment of long-term debt and finance leases(352,104) (4,054) 
Cash dividends paid(314,279) (295,483) 
Repurchase of common stock(211,196) (254,429) 
Exercise of stock options17,544  161,399  
Net cash provided by (used in) financing activities295,858  (698,730) 
Effect of exchange rate changes on cash and cash equivalents(17,351) 3,753  
Increase (decrease) in cash and cash equivalents, including cash classified as held for sale682,752  (222,035) 
Less: Increase in cash and cash equivalents classified as held for sale (see Note 8)
(10,683) —  
Net increase (decrease) in cash and cash equivalents672,069  (222,035) 
Cash and cash equivalents, beginning of period493,262  587,998  
Cash and cash equivalents, end of period$1,165,331  $365,963  
Supplemental Disclosure
Interest paid$74,944  $72,167  
Income taxes paid71,633  136,922  
 Nine Months Ended
 September 29, 2019 September 30, 2018
Operating Activities   
Net income including noncontrolling interest$942,334
 $839,451
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization218,841
 225,803
Stock-based compensation expense39,579
 35,668
Deferred income taxes6,451
 1,343
Impairment of long-lived assets (see Notes 6 and 8)4,741
 28,817
Write-down of equity investments18,564
 23,067
Other34,386
 22,433
Changes in assets and liabilities, net of business acquisitions and divestitures:   
Accounts receivable—trade, net(240,457) (212,193)
Inventories(174,514) (111,901)
Prepaid expenses and other current assets(3,545) (59,182)
Accounts payable and accrued liabilities108,169
 (1,665)
Accrued income taxes39,871
 125,698
Contributions to pension and other benefit plans(13,859) (26,705)
Other assets and liabilities12,826
 2,227
Net cash provided by operating activities993,387
 892,861
Investing Activities   
Capital additions (including software)(236,599) (241,214)
Proceeds from sales of property, plant and equipment and other long-lived assets228
 46,652
Proceeds from sales of businesses, net of cash and cash equivalents divested
 171,950
Equity investments in tax credit qualifying partnerships(52,658) (34,170)
Business acquisitions, net of cash and cash equivalents acquired(401,461) (915,457)
Other investing activities(7,151) 
Net cash used in investing activities(697,641) (972,239)
Financing Activities   
Increase in short-term debt80,707
 893,365
Long-term borrowings5,116
 1,199,891
Repayment of long-term debt and finance leases(4,895) (910,851)
Repayment of tax receivable obligation
 (72,000)
Cash dividends paid(453,210) (415,178)
Repurchase of common stock(445,870) (199,665)
Exercise of stock options235,328
 33,454
Net cash (used in) provided by financing activities(582,824) 529,016
Effect of exchange rate changes on cash and cash equivalents1,716
 (6,030)
(Decrease) Increase in cash and cash equivalents(285,362) 443,608
Cash and cash equivalents, beginning of period587,998
 380,179
Cash and cash equivalents, end of period$302,636
 $823,787
Supplemental Disclosure   
Interest paid$105,164
 $99,886
Income taxes paid162,757
 94,969

See Notes to Unaudited Consolidated Financial Statements.


The Hershey Company | Q2 2020 Form 10-Q | Page 5
6



THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months Ended September 29, 2019 and September 30, 2018
(in thousands)
(unaudited)

 Preferred
Stock
 Common
Stock
 Class B
Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Treasury
Common
Stock
 Accumulated Other
Comprehensive
Income (Loss)
 Noncontrolling
Interests in
Subsidiaries
 Total
Stockholders’
Equity
Balance, July 1, 2019 $
 $299,287
 $60,614
 $1,075,187
 $7,358,277
 $(6,781,509) $(336,736) $8,961
 $1,684,081
Net income (loss)         325,307
     (125) 325,182
Other comprehensive income (loss)             12,595
 (407) 12,188
Dividends (including dividend equivalents):                  
Common Stock, $0.773 per share         (115,380)       (115,380)
Class B Common Stock, $0.702 per share         (42,551)       (42,551)
Stock-based compensation       15,583
         15,583
Exercise of stock options and incentive-based transactions       39,723
   34,206
     73,929
Repurchase of common stock           (191,441)     (191,441)
Balance, September 29, 2019 $
 $299,287
 $60,614
 $1,130,493
 $7,525,653
 $(6,938,744) $(324,141) $8,429
 $1,761,591

  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, July 2, 2018 $
 $299,281
 $60,620
 $940,046
 $6,727,127
 $(6,609,312) $(367,818) $13,873
 $1,063,817
Net income         263,713
     1,700
 265,413
Other comprehensive income (loss)             31,864
 (1,203) 30,661
Dividends (including dividend equivalents):                  
Common Stock, $0.722 per share         (108,016)       (108,016)
Class B Common Stock, $0.656 per share         (39,767)       (39,767)
Stock-based compensation       11,932
         11,932
Exercise of stock options and incentive-based transactions       5,781
   19,451
     25,232
Balance, September 30, 2018 $
 $299,281
 $60,620
 $957,759
 $6,843,057
 $(6,589,861) $(335,954) $14,370
 $1,249,272


See Notes to Unaudited Consolidated Financial Statements.


7



THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the NineThree Months Ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018
(in thousands)
(unaudited)
  Preferred
Stock
 Common
Stock
 Class B
Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Treasury
Common
Stock
 Accumulated Other
Comprehensive
Income (Loss)
 Noncontrolling
Interests in
Subsidiaries
 Total
Stockholders’
Equity
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)         942,505
     (171) 942,334
Other comprehensive income             32,639
 55
 32,694
Dividends (including dividend equivalents):                  
Common Stock, $2.217 per share         (330,709)       (330,709)
Class B Common Stock, $2.014 per share         (122,076)       (122,076)
Stock-based compensation       38,711
         38,711
Exercise of stock options and incentive-based transactions       109,577
   125,751
     235,328
Repurchase of common stock           (445,870)     (445,870)
Impact of ASU 2016-02 related to leases         3,913
       3,913
Balance, September 29, 2019 $
 $299,287
 $60,614
 $1,130,493
 $7,525,653
 $(6,938,744) $(324,141) $8,429
 $1,761,591


Preferred
Stock
Common
Stock
Class B 
Common 
StockAdditional
Paid-in
Capital
Retained
Earnings
Treasury
Common
Stock
Accumulated Other
Comprehensive
Income (Loss)Noncontrolling
Interests in
Subsidiaries
Total
Stockholders’
Equity
Balance, March 29, 2020— 160,939 60,614 1,153,130 1,404,453 (742,164)(365,741)3,310 1,674,541 
Net income (loss)268,901 (859)268,042 
Other comprehensive (loss) income(1,452)33 (1,419)
Dividends (including dividend equivalents):
Common Stock, $0.773 per share(114,260)(114,260)
Class B Common Stock, $0.702 per share(42,551)(42,551)
Stock-based compensation12,612 12,612 
Exercise of stock options and incentive-based transactions(3,864)5,008 1,144 
Repurchase of common stock(42,020)(42,020)
Balance, June 28, 2020$— $160,939 $60,614 $1,161,878 $1,516,543 $(779,176)$(367,193)$2,484 $1,756,089 

  Preferred
Stock
 Common
Stock
 Class B
Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Treasury
Common
Stock
 Accumulated Other
Comprehensive
Income (Loss)
 Noncontrolling
Interests in
Subsidiaries
 Total
Stockholders’
Equity
Balance, December 31, 2017 $
 $299,281
 $60,620
 $924,978
 $6,371,082
 $(6,426,877) $(313,746) $16,227
 $931,565
Net income (loss)         840,771
     (1,320) 839,451
Other comprehensive income (loss)             25,448
 (537) 24,911
Dividends (including dividend equivalents):                  
Common Stock, $2.034 per share         (304,426)       (304,426)
Class B Common Stock, $1.848 per share         (112,026)       (112,026)
Stock-based compensation       36,008
         36,008
Exercise of stock options and incentive-based transactions       (3,227)   36,681
     33,454
Repurchase of common stock           (199,665)     (199,665)
Reclassification of tax effects relating to U.S. tax reform         47,656
   (47,656)   
Balance, September 30, 2018 $
 $299,281
 $60,620
 $957,759
 $6,843,057
 $(6,589,861) $(335,954) $14,370
 $1,249,272
Preferred
Stock
Common
Stock
Class B 
Common 
StockAdditional
Paid-in
Capital
Retained
Earnings
Treasury
Common
Stock
Accumulated Other
Comprehensive
Income (Loss)Noncontrolling
Interests in
Subsidiaries
Total
Stockholders’
Equity
Balance, March 31, 2019— 299,287 60,614 996,181 7,193,240 (6,786,065)(348,520)8,623 1,423,360 
Net income312,840 431 313,271 
Other comprehensive income (loss)11,784 (93)11,691 
Dividends (including dividend equivalents):
Common Stock, $0.722 per share(108,041)(108,041)
Class B Common Stock, $0.656 per share(39,762)(39,762)
Stock-based compensation12,665 12,665 
Exercise of stock options and incentive-based transactions66,341 60,485 126,826 
Repurchase of common stock(55,929)(55,929)
Balance, June 30, 2019$— $299,287 $60,614 $1,075,187 $7,358,277 $(6,781,509)$(336,736)$8,961 $1,684,081 


See Notes to Unaudited Consolidated Financial Statements.










8The Hershey Company | Q2 2020 Form 10-Q | Page 6


THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 28, 2020 and June 30, 2019
(in thousands)
(unaudited)


Preferred
Stock
Common
Stock
Class B 
Common 
StockAdditional
Paid-in
Capital
Retained
Earnings
Treasury
Common
Stock
Accumulated Other
Comprehensive
Income (Loss)Noncontrolling
Interests in
Subsidiaries
Total
Stockholders’
Equity
Balance, December 31, 2019— 160,939 60,614 1,142,210 1,290,461 (591,036)(323,966)5,772 1,744,994 
Net income (loss)540,038 (3,213)536,825 
Other comprehensive loss(43,227)(75)(43,302)
Dividends (including dividend equivalents):
Common Stock, $1.546 per share(228,854)(228,854)
Class B Common Stock, $1.404 per share(85,102)(85,102)
Stock-based compensation25,180 25,180 
Exercise of stock options and incentive-based transactions(5,512)23,056 17,544 
Repurchase of common stock(211,196)(211,196)
Balance, June 28, 2020$— $160,939 $60,614 $1,161,878 $1,516,543 $(779,176)$(367,193)$2,484 $1,756,089 

Preferred
Stock
Common
Stock
Class B 
Common 
StockAdditional
Paid-in
Capital
Retained
Earnings
Treasury
Common
Stock
Accumulated Other
Comprehensive
Income (Loss)Noncontrolling
Interests in
Subsidiaries
Total
Stockholders’
Equity
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)617,198 (46)617,152 
Other comprehensive income20,044 462 20,506 
Dividends (including dividend equivalents):
Common Stock, $1.444 per share(215,329)(215,329)
Class B Common Stock, $1.312 per share(79,525)(79,525)
Stock-based compensation23,128 23,128 
Exercise of stock options and incentive-based transactions69,854 91,545 161,399 
Repurchase of common stock(254,429)(254,429)
Impact of ASU 2016-02 related to leases3,913 3,913 
Balance, June 30, 2019$— $299,287 $60,614 $1,075,187 $7,358,277 $(6,781,509)$(336,736)$8,961 $1,684,081 


See Notes to Unaudited Consolidated Financial Statements.

The Hershey Company | Q2 2020 Form 10-Q | Page 7

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




1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements provided in this report include the accounts of The Hershey Company (the “Company,” “Hershey,” “we” or “us”) and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock and the noncontrollingminority shareholders do not have substantive participating rights, or we have significant control over an entity through contractual or economic interests in which we are the primary beneficiary.beneficiary or we have the power to direct the activities that most significantly impact the entity's economic performance. We use the equity method of accounting when we have a 20% to 50% interest in other companies and exercise significant influence. 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.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. The financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods.
Operating results for the quarter ended September 29, 2019June 28, 2020 may not be indicative of the results that may be expected for the year ending December 31, 20192020 because of seasonal effects on our business. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20182019 (our “2018“2019 Annual Report on Form 10-K”), which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.
Recent Accounting PronouncementsCOVID-19
Recently Adopted Accounting PronouncementsOn March 11, 2020, the World Health Organization designated the recent novel coronavirus ("COVID-19") as a global pandemic. We continue to actively monitor COVID-19 and its potential impact on our operations and financial results. Employee health and safety remains our first priority while we continue our efforts to support community food supplies. To date, there has been minimal disruption to our supply chain network, and all our manufacturing plants are currently open. We are also working closely with our business units, contract manufacturers, distributors, contractors and other external business partners to minimize the potential impact on our business.
In February 2016,As a result of shelter-in-place restrictions that were implemented in late March and early April, as well as decreases in retail foot traffic and volatility in consumer shopping and consumption behavior across several areas of our portfolio, we experienced a reduction in our net sales and earnings per share during the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). This ASU requires lesseessecond quarter of 2020. We believe the financial impacts from COVID-19 are temporary in nature and do not significantly affect our business model and growth strategy. Therefore, we do not consider COVID-19 to recognize 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, usingbe a modified retrospective approach and applying the standard’s transition provisions at January 1, 2019, the effective date.triggering event to accelerate our annual impairments tests.
We electedevaluated our goodwill and indefinite-lived intangible assets and determined there were no interim triggering events as it was not more likely than not that the package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward the historical lease classification.  In addition, we made accounting policy elections to combine the lease and non-lease components for asset categories that support selling, marketing and general administrative activities. These asset categories comprise the majorityfair value of our leases. Finally,reporting units would be less than their respective carrying amounts. Additionally, we made elections to exclude from balance sheet reporting those leases with initial terms of 12 months or less.
Adoption of the new standard resulted in the recording of operatingevaluated our long-lived assets, including our property, plant and equipment, lease ROUright-of-use assets and lease liabilitiesother intangible assets, noting no indicators of $227,258impairment.
In late May and $216,966, respectively, withearly June, many state governments began a phased reopening of their economies. These phased approaches promote limited food service offerings, outdoor dining, increased travel and the difference largely duereopening of retailing establishments while adhering to prepaidnew guidelines and deferred rentenhanced safety measures, including social distancing and face mask protocols. However, certain states have paused or reversed plans to reopen their economies as new cases of COVID-19 have been on the rise in recent weeks.
The impact that were reclassified to the ROU asset value. In addition, we derecognized a build-to-suit arrangement in accordance with the transition requirements, which resulted in an adjustment to retained earnings of $3,913. The standard did not materially affect our consolidated net income or cash flows. See Note 7 for further details.
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 – 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 quarter of 2019 using a modified retrospective approach. Adoption of the new standard did notCOVID-19 will have a material impact on our consolidated financial statements.statements throughout 2020 remains uncertain and ultimately will be dictated by the length and severity of the pandemic, as well as the economic recovery and federal,


The Hershey Company | Q2 2020 Form 10-Q | Page 8

9

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


state and local government actions taken in response. We will continue to evaluate the nature and extent of these potential impacts to our business and consolidated financial statements.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In JuneAugust 2018, the FASBFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-14, 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 post-retirement plans. ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements2018-14 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to Nonemployee Share-Based Payment Accounting. This ASU is intendedall periods presented. We elected to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. We adoptedearly adopt the provisions of this ASU in the firstfourth quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU permits a company to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act (“U.S. tax reform”) on items within Accumulated Other Comprehensive Income ("AOCI") to retained earnings. We adopted the provisions of this ASU in the first quarter of 2018. We elected to reclassify the income tax effects of U.S. tax reform from items in AOCI as of January 1, 2018 so that the tax effects of items within AOCI are reflected at the appropriate tax rate. The impact of the reclassification resulted in a $47,656 decrease to AOCI and a corresponding increase to retained earnings.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods presented. We will adoptadopted the provisions of this ASU in the first quarter of 2020. Based on our assessment, adoptionAdoption of the new standard isdid not expected to have a material impact on our consolidated financial statements and related disclosures.statements.
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 will adoptadopted the provisions of this ASU in the first quarter of 2020. Based on our assessment, adoptionAdoption of the new standard isdid not expected to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, 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 post-retirement plans. ASU 2018-14 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to all periods presented. We intend to early adopt the provisions of this ASU in the fourth quarter of 2019. 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 will adoptadopted the provisions of this ASU in the first quarter of 2020 on a prospective basis. Based on our assessment, adoptionAdoption of the new standard isdid not expected to have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
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.

The Hershey Company | Q2 2020 Form 10-Q | Page 9

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

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. Entities may apply this ASU upon issuance through December 31, 2022 on a prospective 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.


10

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

2. BUSINESS ACQUISITIONSACQUISITION AND DIVESTITURES
2020 Activity
During the second quarter of 2020, we completed the divestitures of KRAVE Pure Foods, Inc., and the Scharffen Berger and Dagoba brands, all of which were previously included within the North America segment results in our consolidated financial statements. Total proceeds from the divestitures and the impact on our Consolidated Statements of Income, both individually and on an aggregate basis, were immaterial.
2019 Activity
ONE Brands, LLC

On September 23, 2019, we completed the acquisition of ONE Brands, LLC ("ONE Brands"), previously a privately held company that sells proprietary nutritional supplement productsa 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 $401,461$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 hasBrands' results of operations have been included within the North America segment.segment results in our consolidated financial statements since the 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)AdjustmentsFinal Allocation
Goodwill$179,240  $825  $180,065  
Other intangible assets206,800  —  206,800  
Other assets acquired, primarily current assets25,926  (491) 25,435  
Other liabilities assumed, primarily current liabilities(9,806) (334) (10,140) 
Net assets acquired$402,160  $—  $402,160  
(1)As reported in the Company's 2019 Annual Report on Form 10-K.
Goodwill$178,179
Other intangible assets206,800
Other assets acquired, primarily current assets25,760
Other liabilities assumed, primarily current liabilities(9,278)
Net assets acquired$401,461


The purchase price allocation presented above is preliminary. Wehas been finalized as of the end of the first quarter of 2020. The measurement period adjustments to the initial allocation are inbased on more detailed information obtained about the process of refining the valuation ofspecific assets acquired assets and liabilities including goodwill, and expect to finalize the purchase price allocation in the fourth quarter of 2019.assumed.

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 goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of ONE Brands products.

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 ranging from 17 to 19 years and covenants not to compete were assigned an estimated useful life of 4 years.


The Hershey Company | Q2 2020 Form 10-Q | Page 10

11

THE HERSHEY COMPANY
NOTES TO UNAUDITED 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 B&G Foods, Inc. Pirate Brands offers baked, trans fat free and gluten free snacks and is available in a wide range of food distribution channels in the United States. The purchase consideration for Pirate Brands totaled $423,002 and consisted of short-term borrowings and cash on hand. Acquisition-related costs for the Pirate Brands acquisition were immaterial.

The acquisition has been accounted for as 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 assets acquired and liabilities assumed based on their respective fair values as follows:

Inventories$4,663
Property, plant and equipment, net48
Goodwill129,991
Other intangible assets289,300
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 goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging the Company's resources to expand the distribution locations and customer base for the Pirate Brands' products.

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



12

THE HERSHEY COMPANY
NOTES TO UNAUDITED 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 assets34,593
Property, plant and equipment, net67,989
Goodwill966,389
Other intangible assets682,000
Other non-current assets1,049
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 Operations.


13

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

3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill by reportable segment for the ninesix months ended September 29, 2019June 28, 2020 are as follows:
North America    International and OtherTotal
Balance at December 31, 2019$1,967,466  $18,489  $1,985,955  
Measurement period adjustments (see Note 2)
825  —  825  
Foreign currency translation(5,496) (2,282) (7,778) 
Balance at June 28, 2020$1,962,795  $16,207  $1,979,002  
  North America     International and Other Total
Balance at December 31, 2018 $1,782,845
 $18,258
 $1,801,103
Acquired during the period (see Note 2) 178,179
 
 178,179
Foreign currency translation 3,186
 (106) 3,080
Balance at September 29, 2019 $1,964,210
 $18,152
 $1,982,362


The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset:
  September 29, 2019 December 31, 2018
  Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Intangible assets subject to amortization:        
Trademarks $1,323,225
 $(87,329) $1,173,770
 $(60,995)
Customer-related 223,610
 (41,682) 163,860
 (33,516)
Patents 16,545
 (16,273) 16,306
 (15,772)
Total 1,563,380
 (145,284) 1,353,936
 (110,283)
         
Intangible assets not subject to amortization:        
Trademarks 34,630
   34,639
  
Total other intangible assets $1,452,726
   $1,278,292
  

June 28, 2020December 31, 2019
Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
Intangible assets subject to amortization:
Trademarks$1,207,594  $(86,910) $1,212,172  $(73,262) 
Customer-related202,371  (42,670) 207,749  (40,544) 
Patents7,980  (7,885) 16,711  (16,525) 
Total1,417,945  (137,465) 1,436,632  (130,331) 
Intangible assets not subject to amortization:
Trademarks33,852  34,865  
Total other intangible assets$1,314,332  $1,341,166  
Total amortization expense for the three months ended September 29,June 28, 2020 and June 30, 2019 was $11,580 and September 30, 2018 was $12,684 and $9,573,$12,672, respectively. Total amortization expense for the ninesix months ended September 29,June 28, 2020 and June 30, 2019 was $23,220 and September 30, 2018 was $37,593 and $27,858,$24,910, respectively.

4. SHORT AND LONG-TERM DEBT
Short-term Debt
As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. As of September 29, 2019, we maintainedWe maintain a $1.5 billion unsecured revolving credit facility with the option to increase borrowings by an additional $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 credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of September 29, 2019,June 28, 2020, we were in compliance with all covenants pertaining to the credit agreement, and we had no significant compensating balance agreements that legally restricted these funds. For more information, refer to the Consolidated Financial Statements included in our 2018 Annual2019Annual Report on Form 10-K.
In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. We had short-term foreign bank loans against these lines of credit for $71,792 at September 29, 2019 and $113,189 at December 31, 2018. Commitment fees relating to our revolving credit facility and lines of credit are not material.
At September 29, 2019, we had outstanding commercial paper totaling $1,203,638, at a weighted average interest rate of 2.1%. At December 31, 2018, we had outstanding commercial paper totaling $1,084,740, at a weighted average interest rate of 2.4%.


14The Hershey Company | Q2 2020 Form 10-Q | Page 11

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

In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. Commitment fees relating to our revolving credit facility and lines of credit are not material. Short-term debt consisted of the following:
June 28, 2020December 31, 2019
Short-term foreign bank borrowings against lines of credit$48,421  $32,282  
U.S. commercial paper149,878  —  
Total short-term debt$198,299  $32,282  
Weighted average interest rate on outstanding commercial paper0.4 %N/A

Long-term Debt
Long-term debt consisted of the following:
  September 29, 2019 December 31, 2018
2.90% Notes due 2020 $350,000
 $350,000
4.125% Notes due 2020 350,000
 350,000
3.10% Notes due 2021 350,000
 350,000
8.8% Debentures due 2021 84,715
 84,715
3.375% Notes due 2023 500,000
 500,000
2.625% Notes due 2023 250,000
 250,000
3.20% Notes due 2025 300,000
 300,000
2.30% Notes due 2026 500,000
 500,000
7.2% Debentures due 2027 193,639
 193,639
3.375% Notes due 2046 300,000
 300,000
Finance lease liabilities 78,253
 101,980
Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts (11,357) (20,667)
Total long-term debt 3,245,250
 3,259,667
Less—current portion 352,954
 5,387
Long-term portion $2,892,296
 $3,254,280
Debt Type and RateMaturity DateJune 28, 2020December 31, 2019
2.900% Notes (1)May 15, 2020$—  $350,000  
4.125% NotesDecember 1, 2020350,000  350,000  
8.800% DebenturesFebruary 15, 202184,715  84,715  
3.100% NotesMay 15, 2021350,000  350,000  
2.625% NotesMay 1, 2023250,000  250,000  
3.375% NotesMay 15, 2023500,000  500,000  
2.050% NotesNovember 15, 2024300,000  300,000  
0.900% Notes (2)June 1, 2025300,000  —  
3.200% NotesAugust 21, 2025300,000  300,000  
2.300% NotesAugust 15, 2026500,000  500,000  
7.200% DebenturesAugust 15, 2027193,639  193,639  
2.450% NotesNovember 15, 2029300,000  300,000  
1.700% Notes (2)June 1, 2030350,000  —  
3.375% NotesAugust 15, 2046300,000  300,000  
3.125% NotesNovember 15, 2049400,000  400,000  
2.650% Notes (2)June 1, 2050350,000  —  
Finance lease obligations (see Note 7)
80,447  79,643  
Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts(29,142) (23,794) 
Total long-term debt4,879,659  4,234,203  
Less—current portion788,448  703,390  
Long-term portion$4,091,211  $3,530,813  

The Hershey Company | Q2 2020 Form 10-Q | Page 12

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

(1)In May 2020, we repaid $350,000 of 2.900% Notes due upon their maturity.
(2)During the second quarter of 2020, we issued $300,000 of 0.900% Notes due in 2025, $350,000 of 1.700% Notes due in 2030 and $350,000 of 2.650% Notes due in 2050 (the "2020 Notes"). Proceeds from the issuance of the 2020 Notes, net of discounts and issuance costs, totaled $989,876. The 2020 Notes were issued under a shelf registration statement on Form S-3 filed in May 2018 that registered an indeterminate amount of debt securities.
Interest Expense
Net interest expense consists of the following:
Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Interest expense$40,520  $39,192  $79,776  $79,855  
Capitalized interest(1,664) (1,391) (3,081) (2,648) 
Interest expense38,856  37,801  76,695  77,207  
Interest income(777) (4,025) (2,361) (5,973) 
Interest expense, net$38,079  $33,776  $74,334  $71,234  
  Three Months Ended Nine Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Interest expense $37,845
 $39,978
 $117,700
 $110,929
Capitalized interest (1,510) (1,243) (4,158) (3,876)
Interest expense 36,335
 38,735
 113,542
 107,053
Interest income (879) (1,819) (6,852) (5,846)
Interest expense, net $35,456
 $36,916
 $106,690
 $101,207

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.


15

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

Commodity Price Risk
We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3- to 24-month periods. Our open commodity derivative contracts had a notional value of $871,219$817,521 as of September 29, 2019June 28, 2020 and $693,463$589,662 as of December 31, 2018.2019.
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 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 Malaysian ringgit and Mexican Peso.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 $34,397$84,383 at September 29, 2019June 28, 2020 and $29,458$65,826 at December 31, 2018.2019. The effective portion of the changes in fair value on these contracts is recorded in other

The Hershey Company | Q2 2020 Form 10-Q | Page 13

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

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 $32,077$42,057 at September 29, 2019June 28, 2020 and $11,072$50,831 at December 31, 2018.2019. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.
Interest Rate Risk
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 September 29, 2019June 28, 2020 and December 31, 2018.2019.
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.
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 September 29, 2019June 28, 2020 and December 31, 20182019 was $27,857$22,995 and $33,168,$28,187, respectively.
The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of June 28, 2020 and December 31, 2019:
June 28, 2020December 31, 2019
Assets (1)Liabilities (1)Assets (1)Liabilities (1)
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts$4,492  $370  $1,235  $1,779  
Derivatives designated as fair value hedging instruments:
Interest rate swap agreements2,829  —  555  —  
Derivatives not designated as hedging instruments:
Commodities futures and options (2)—  23,840  9,080  626  
Deferred compensation derivatives4,626  —  2,557  —  
Foreign exchange contracts—  2,111  1,496  —  
4,626  25,951  13,133  626  
Total$11,947  $26,321  $14,923  $2,405  

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

16The Hershey Company | Q2 2020 Form 10-Q | Page 14

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


(2)As of June 28, 2020, amounts reflected on a net basis in liabilities were assets of $95,969 and liabilities of $117,217, which are associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The following table presentscomparable amounts reflected on a net basis in assets at December 31, 2019 were assets of $46,075 and liabilities of $37,606. At June 28, 2020 and December 31, 2019, the classification of derivativeremaining amount reflected in assets and liabilities withinrelated to the Consolidated Balance Sheets asfair value of September 29, 2019 and December 31, 2018:
  September 29, 2019 December 31, 2018
  Assets (1) Liabilities (1) Assets (1) Liabilities (1)
Derivatives designated as cash flow hedging instruments:        
Foreign exchange contracts $700
 $1,001
 $3,394
 $485
         
Derivatives designated as fair value hedging instruments:        
Interest rate swap agreements 4,243
 
 
 4,832
         
Derivatives not designated as hedging instruments:        
Commodities futures and options (2) 
 4,220
 7,230
 262
Deferred compensation derivatives 165
 
 
 4,736
Foreign exchange contracts 11
 928
 70
 484
  176
 5,148
 7,300
 5,482
Total $5,119
 $6,149
 $10,694
 $10,799

other non-exchange traded derivative instruments, respectively.

(1)Derivatives assets are classified on our balance sheet within prepaid expenses and other as well as other assets. Derivative liabilities are classified on our balance sheet within accrued liabilities and other long-term liabilities.
(2)As of September 29, 2019, amounts reflected on a net basis in liabilities were assets of $63,855 and liabilities of $67,745, which are associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in assets at December 31, 2018 were assets of $63,978 and liabilities of $57,351. At September 29, 2019 and December 31, 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 three months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018 was as follows:
Non-designated HedgesCash Flow Hedges
Gains (losses) recognized in income (a)Gains (losses) recognized in other comprehensive income (“OCI”)Gains (losses) reclassified from accumulated OCI into income (b)
202020192020201920202019
Commodities futures and options$2,624  $55,531  $—  $—  $—  $—  
Foreign exchange contracts(554) (526) 675  (2,547) 1,138  975  
Interest rate swap agreements—  —  —  —  (2,343) (2,370) 
Deferred compensation derivatives4,626  (2,070) —  —  —  —  
Total$6,696  $52,935  $675  $(2,547) $(1,205) $(1,395) 
  Non-designated Hedges Cash Flow Hedges
   
  Gains (losses) recognized in income (a) Gains (losses) recognized in other comprehensive income (“OCI”) Gains (losses) reclassified from accumulated OCI into income (b)
             
  2019 2018 2019 2018 2019 2018
Commodities futures and options $(9,043) $(71,088) $
 $
 $
 $
Foreign exchange contracts (1,224) 1,595
 1,045
 (1,484) (987) 4,605
Interest rate swap agreements 
 
 
 
 (2,344) (2,344)
Deferred compensation derivatives 165
 1,345
 
 
 
 
Total $(10,102) $(68,148) $1,045
 $(1,484) $(3,331) $2,261


17

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

The effect of derivative instruments on the Consolidated Statements of Income for the ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018 was as follows:
Non-designated HedgesCash Flow Hedges
Gains (losses) recognized in income (a)Gains (losses) recognized in OCIGains (losses) reclassified from accumulated OCI into income (b)
202020192020201920202019
Commodities futures and options$(74,468) $28,890  $—  $—  $—  $—  
Foreign exchange contracts(3,876) (311) 6,056  (3,336) 1,390  1,906  
Interest rate swap agreements—  —  —  —  (4,687) (4,739) 
Deferred compensation derivatives(1,133) 973  —  —  —  —  
Total$(79,477) $29,552  $6,056  $(3,336) $(3,297) $(2,833) 
  Non-designated Hedges Cash Flow Hedges
   
  Gains (losses) recognized in income (a) Gains (losses) recognized in other comprehensive income (“OCI”) Gains (losses) reclassified from accumulated OCI into income (b)
             
  2019 2018 2019 2018 2019 2018
Commodities futures and options $19,847
 $(4,315) $
 $
 $
 $
Foreign exchange contracts (1,535) 1,580
 (2,291) 6,320
 919
 4,648
Interest rate swap agreements 
 
 
 
 (7,083) (7,110)
Deferred compensation derivatives 4,181
 2,151
 
 
 
 
Total $22,493
 $(584) $(2,291) $6,320
 $(6,164) $(2,462)


(a)Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.
(a)Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.
(b)Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.
(b)Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.
The 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 $9,745$5,252 as of September 29, 2019.June 28, 2020. This amount is primarily associated with interest rate swap agreements.
Fair Value Hedging Relationships
The following table presents amounts that were recorded on the balance sheetConsolidated Balance Sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of September 29, 2019June 28, 2020 and December 31, 2018.2019.
Line Item in the Consolidated Balance Sheet in Which the Hedged Item is Included 
Carrying Amount of the
Hedged Asset/(Liability)
 Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount Assets/(Liabilities)
  September 29, 2019 December 31, 2018 September 29, 2019 December 31, 2018
Long-term debt $(345,757) $(354,832) $4,243
 $(4,832)

The Hershey Company | Q2 2020 Form 10-Q | Page 15

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

Line Item in the Consolidated Balance Sheets in Which the Hedged Item is IncludedCarrying Amount of the
Hedged Asset/(Liability)
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount Assets/(Liabilities)
June 28, 2020December 31, 2019June 28, 2020December 31, 2019
Long-term debt$(347,171) $(349,445) $2,829  $555  
For the three months ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, we recognized a net pretax benefit to interest expense of $608 and net incremental interest expense of $458 and $370,$584, respectively, relating to our fixed-to-floating interest swap arrangements. For the ninesix months ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, we recognized a net pretax benefit to interest expense of $759 and net incremental interest expense of $1,672 and a net benefit to interest expense of $245$1,214, 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.



18

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

We did not0t 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 September 29, 2019June 28, 2020 and December 31, 2018:2019:
Assets (Liabilities)
Level 1Level 2Level 3Total
June 28, 2020:
Derivative Instruments:
Assets:
Foreign exchange contracts (1)$—  $4,492  $—  $4,492  
Interest rate swap agreements (2)—  2,829  —  2,829  
Deferred compensation derivatives (3)—  4,626  —  4,626  
Liabilities:
Foreign exchange contracts (1)—  2,481  —  2,481  
Commodities futures and options (4)23,840  —  —  23,840  
December 31, 2019:
Assets:
Foreign exchange contracts (1)$—  $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  
(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
  Assets (Liabilities)
  Level 1 Level 2 Level 3 Total
September 29, 2019:        
Derivative Instruments:        
Assets:        
Foreign exchange contracts (1) $
 $711
 $
 $711
Interest rate swap agreements (2) 
 4,243
 
 4,243
Deferred compensation derivatives (3) 
 165
 
 165
Commodities futures and options (4) 
 
 
 
Liabilities:        
Foreign exchange contracts (1) 
 1,929
 
 1,929
Commodities futures and options (4) 4,220
 
 
 4,220
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

(1)The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences.
(2)The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments.
(3)The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index.
(4)The fair value of commodities futures and options contracts is based on quoted market prices.
The Hershey Company | Q2 2020 Form 10-Q | Page 16

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

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, accounts receivable, accounts payable and short-term debt approximated fair values as of September 29, 2019June 28, 2020 and December 31, 20182019 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:


19

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

  Fair Value Carrying Value
  September 29, 2019 December 31, 2018 September 29, 2019 December 31, 2018
Current portion of long-term debt $354,661
 $5,387
 $352,954
 $5,387
Long-term debt 3,041,644
 3,228,877
 2,892,296
 3,254,280
Total $3,396,305
 $3,234,264
 $3,245,250
 $3,259,667

Fair ValueCarrying Value
June 28, 2020December 31, 2019June 28, 2020December 31, 2019
Current portion of long-term debt$806,276  $712,863  $788,448  $703,390  
Long-term debt4,402,998  3,656,540  4,091,211  3,530,813  
Total$5,209,274  $4,369,403  $4,879,659  $4,234,203  
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.
2020 Activity
During the first six months ended June 28, 2020, we recorded the following impairment charges, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy:
2020
Adjustment to disposal group (1)$6,200 
Other asset write-down (2)2,943 
Long-lived asset impairment charges$9,143 
(1)In connection with our disposal group classified as held for sale, as discussed in Note 8, during 2020, 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 during 2020.
(2)In connection with a previous sale, the Company wrote-down certain receivables deemed uncollectible.

2019 Activity
During the second quarter of 2019, we recorded impairment charges totaling $4,741. These charges were predominantly comprised of select long-lived assets that had not yet met the held for sale criteria.
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. Additionally, during 2019, we recorded impairment charges totaling $4,741. These charges were predominantly comprised of select land that had not yet met the held for sale criteria.

The fair value of the land was supported by potential sales prices with third-party buyers.Hershey Company | Q2 2020 Form 10-Q | Page 17
2018 Activity

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
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 previously classified as held for sale, during 2018, we recorded impairment charges totaling $28,817 to adjust the long-lived asset values within the Shanghai Golden Monkey ("SGM") and Tyrrells disposal groups. These charges represented the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts to be realized upon completion of the sales, over the estimated fair values less costs to sell for the respective businesses. The fair values of the disposal groups were supported by the sales prices agreed with the third-party buyers. In July 2018, we sold the SGM and Tyrrells businesses.
7. LEASES
We lease office and retail space, warehouse and distribution facilities, land, vehicles, and equipment. We determine if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of lease payments over the lease term and are recognized at the lease commencement date.
As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants.


20

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

For real estate, equipment and vehicles that support selling, marketing and general administrative activities the Company accounts for the lease and non-lease components as a single lease component. These asset categories comprise the majority of our leases. The lease and non-lease components of real estate and equipment leases supporting production activities are not accounted for as a single lease component. Consideration for such contracts are allocated to the lease component and non-lease components based upon relative standalone prices either observable or estimated if observable prices are not readily available.
As a result of the impact of COVID-19 on our ability to operate certain parts of our business, during the second quarter of 2020, we received immaterial rent concessions primarily on select office space. We will continue to evaluate the nature and extent of potential COVID-19 impacts on our long-lived asset groups, including any required reassessment of lease agreements.
The components of lease expense for the three months ended June 28, 2020 and June 30, 2019 were as follows:
Three Months Ended
Lease expenseClassificationJune 28, 2020June 30, 2019
Operating lease costCost of sales or SM&A (1)$10,673  $10,273  
Finance lease cost:
Amortization of ROU assetsDepreciation and amortization (1)1,949  1,884  
Interest on lease liabilitiesInterest expense, net1,112  1,112  
Net lease cost (2)$13,734  $13,269  
    Three Months Ended Nine Months Ended
Lease expense Classification September 29, 2019 September 29, 2019
Operating lease cost Cost of sales or SM&A (1) $10,623
 $31,110
Finance lease cost:      
Amortization of ROU assets Depreciation and amortization (1) 1,799
 5,617
Interest on lease liabilities Interest expense, net 1,106
 3,319
Net lease cost (2)   $13,528
 $40,046
(1)Supply chain-related amounts were included in cost of sales.
(2)Net lease cost does not include short-term leases, variable lease costs or sublease income, all of which are immaterial.

Information regarding ourThe components of lease termsexpense for the six months ended June 28, 2020 and discount ratesJune 30, 2019 were as follows:
Six Months Ended
Lease expenseClassificationJune 28, 2020June 30, 2019
Operating lease costCost of sales or SM&A (1)$21,217  $20,487  
Finance lease cost:
Amortization of ROU assetsDepreciation and amortization (1)3,979  3,818  
Interest on lease liabilitiesInterest expense, net2,234  2,213  
Net lease cost (2)$27,430  $26,518  
September 29, 2019
Weighted-average remaining lease term (years)
Operating leases13.9
Finance leases31.7
Weighted-average discount rate
Operating leases3.9%
Finance leases6.0%
(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 Hershey Company | Q2 2020 Form 10-Q | Page 18

21

THE HERSHEY COMPANY
NOTES TO UNAUDITED 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:
June 28, 2020December 31, 2019
Weighted-average remaining lease term (years)
Operating leases13.214.3
Finance leases30.331.4
Weighted-average discount rate
Operating leases3.9 %3.8 %
Finance leases5.9 %6.0 %

Supplemental balance sheet information related to leases were as follows:
LeasesClassificationJune 28, 2020December 31, 2019
Assets
Operating lease ROU assetsOther assets (non-current)$222,854  $220,678  
Finance lease ROU assets, at costProperty, plant and equipment, gross100,841  101,142  
Accumulated amortizationAccumulated depreciation(6,570) (7,225) 
Finance lease ROU assets, netProperty, plant and equipment, net94,271  93,917  
Total leased assets$317,125  $314,595  
Liabilities
Current
OperatingAccrued liabilities$31,234  $29,209  
FinanceCurrent portion of long-term debt4,575  4,079  
Non-current
OperatingOther long-term liabilities184,626  184,163  
FinanceLong-term debt75,872  75,564  
Total lease liabilities$296,307  $293,015  
Leases Classification September 29, 2019
Assets    
Operating lease ROU assets Other assets (non-current) $225,959
     
Finance lease ROU assets, at cost Property, plant and equipment, gross 99,614
Accumulated amortization Accumulated depreciation (5,188)
Finance lease ROU assets, net Property, plant and equipment, net $94,426
     
Total leased assets   $320,385
     
Liabilities    
Current    
Operating Accrued liabilities $28,967
Finance Current portion of long-term debt 3,566
Non-current    
Operating Other long-term liabilities 188,961
Finance Long-term debt 74,687
Total lease liabilities   $296,181


The maturity of our lease liabilities as of September 29, 2019June 28, 2020 were as follows:
Operating leasesFinance leasesTotal
2020 (rest of year)$19,802  $4,260  $24,062  
202137,074  7,925  44,999  
202223,244  6,307  29,551  
202315,446  4,620  20,066  
202414,118  4,579  18,697  
Thereafter172,979  165,115  338,094  
Total lease payments282,663  192,806  475,469  
Less: Imputed interest66,803  112,359  179,162  
Total lease liabilities$215,860  $80,447  $296,307  
 Operating leases Finance leases Total
2019 (rest of year)$9,939
 $1,943
 $11,882
202034,895
 6,970
 41,865
202129,143
 5,741
 34,884
202215,758
 4,632
 20,390
202313,789
 4,602
 18,391
Thereafter185,805
 170,041
 355,846
Total lease payments289,329
 193,929
 483,258
Less: Imputed interest71,401
 115,676
 187,077
Total lease liabilities$217,928
 $78,253
 $296,181


Supplemental cash flow and other information related to leases were as follows:
  Nine Months Ended
  September 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:  
Operating cash flows from operating leases $29,054
Operating cash flows from finance leases 3,319
Financing cash flows from finance leases 2,761
   
ROU assets obtained in exchange for lease liabilities:  
Operating leases 21,998
Finance leases 3,498



The Hershey Company | Q2 2020 Form 10-Q | Page 19
22

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

As of June 28, 2020, the Company had entered 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 $13,000. These leases are expected to commence during the second half of 2020, with lease terms between a year and half and five years.

Supplemental cash flow and other information related to leases were as follows:
Six Months Ended
June 28, 2020June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases21,335  19,142  
Operating cash flows from finance leases2,234  2,213  
Financing cash flows from finance leases2,105  1,920  
ROU assets obtained in exchange for lease liabilities:
Operating leases20,814  21,838  
Finance leases2,076  3,498  

8. ASSETS AND LIABILITIES HELD FOR SALE
As of September 29, 2019,June 28, 2020, the following disposal groups havegroup has been classified as held for sale in each caseand stated at the lower of net book value or estimated sales value less costs to sell:
The Lotte Shanghai Foods Co., Ltd. ("LSFC") joint venture, which was taken out of operation and classified as held for sale during the second quarter of 2018. We sold a portion of the joint venture's equipment in the third and fourth quarters of 2018, as well as the second quarter of 2019, and expect the sale of the remaining business to be completed by the end of 2019.
Other assets, which are predominantly comprised of select Pennsylvania facilities and land that met the held for sale criteria in the third quarter of 2018. We expect these long-lived assets to be sold by the end of 2019.

during 2020.
The amounts classified as assets and liabilities held for sale at September 29, 2019 include the following:June 28, 2020 are not significant.

Assets held for sale, included in prepaid expenses and other assets  
Property, plant and equipment, net $20,905
Other assets 2,434
  $23,339
   
Liabilities held for sale, included in accrued liabilities  
Accounts payable and accrued liabilities $376
  $376


During the nine months ended September 30, 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 a gain on the sale of $2,658, which is recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Operations.
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 9). 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 Operations.
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. CostsSeverance and other program costs associated with business realignment activities are classified in our Consolidated Statements of Income as follows:
Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Selling, marketing and administrative expense$2,645  $238  $2,645  $660  
Business realignment (benefits) costs(1,370) 6,140  (475) 6,202  
Costs associated with business realignment activities$1,275  $6,378  $2,170  $6,862  
Costs recorded by program during the three and six months ended June 28, 2020 and June 30, 2019 related to these activities were as follows:
Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Margin for Growth Program:
Severance$(1,410) $5,823  $(653) $5,823  
Other program costs2,685  555  2,823  1,039  
Total$1,275  $6,378  $2,170  $6,862  


23The Hershey Company | Q2 2020 Form 10-Q | Page 20

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

  Three Months Ended Nine Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Cost of sales $
 $4,565
 $
 $14,101
Selling, marketing and administrative expense 466
 5,198
 1,126
 17,705
Business realignment costs 1,140
 1,660
 7,342
 10,864
Costs associated with business realignment activities $1,606
 $11,423
 $8,468
 $42,670

Costs recorded by program during the three and nine months ended September 29, 2019 and September 30, 2018 were as follows:
  Three Months Ended Nine Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Margin for Growth Program:        
Severance $
 $5,573
 $5,823
 $12,635
Accelerated depreciation 
 4,786
 
 12,030
Other program costs 1,606
 6,549
 2,645
 21,754
Operational Optimization Program:        
Gain on sale of facilities 
 (6,562) 
 (6,562)
Other program costs 
 1,077
 
 2,813
Total $1,606
 $11,423
 $8,468
 $42,670

The following table presents the liability activity for costs qualifying as exit and disposal costs for the ninesix months ended September 29, 2019:June 28, 2020:
 Total
Liability balance at December 31, 2018$14,605
2019 business realignment charges (1)8,468
Cash payments(12,012)
Liability balance at September 30, 2019 (reported within accrued liabilities)$11,061
Total
Liability balance at December 31, 2019$9,118 
2020 business realignment charges (1)2,170 
Cash payments(8,192)
(1)Liability balance at June 28, 2020 (reported within accrued liabilities)The costs reflected in the liability roll-forward represent employee-related and certain third-party service provider charges.$3,096 
Margin for Growth Program
In
(1)The costs reflected in the first quarter 2017, the Company's Board of Directors ("Board") unanimously approved several initiatives under a single program designed to drive continued net sales, operating incomeliability roll-forward represent employee-related and earnings per-share diluted growth over the next several years.  This program is focused on improving global efficiency and effectiveness, optimizing the Company’s supply chain, streamlining the Company’s operating model and reducing administrative expenses to generate long-term savings. 
We originally estimated that the Margin for Growth Program would result in total pre-tax charges of $375,000 to $425,000, to be incurred from 2017 to 2019. The majority of the initiatives relating to the program have been executed, with the final initiatives to be completed over the next several months. To date, we have incurred pre-tax charges to execute the program totaling $344,763. This includes long-lived asset impairment charges of $208,712 related to the operations supporting our China business in 2017, as well as the $16,300 incremental impairment charge resulting from the sale of SGM. In addition to the impairment charges, we have incurred employee separation costs of $53,755 and other business realignment costs of $65,996. We expect the remaining spending on this program to be minimal in 2019. The cash portion of the total program charges is estimated to be $103,000. The Company reduced its global workforce by approximately 15% as a result of this program, with a majority of the reductions coming from hourly headcount positions outside of the United States.


24

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

For the three and nine months ended September 29, 2019, we recognized total costs associated with the Margin for Growth Program of $1,606 and $8,468, respectively. For the three and nine months ended September 30, 2018, we recognized total costs associated with the Margin for Growth Program of $16,908 and $46,419, 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 supply chain. In addition, we incurred other program costs, which relate primarily tocertain third-party charges in support of our initiative to improve global efficiency and effectiveness.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.
2016 Operational OptimizationMargin for Growth Program
In the first quarter 2017, the Company's Board of Directors ("Board") unanimously approved several initiatives under a single program designed to drive continued net sales, operating income and earnings per-share diluted growth over the next several years.  This program 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. 
Total pre-tax charges to execute this Margin for Growth Program were $347,704. This includes long-lived asset impairment charges of $208,712 related to the operations supporting our China business in 2017, as well as a $16,300 incremental impairment charge resulting from the sale of our Shanghai Golden Monkey business. In addition to the impairment charges, we incurred employee separation costs of $52,457 and other business realignment costs of $70,235. The program was completed during the second quarter of 2016, we commenced a program (the “Operational Optimization Program”) to optimize our production2020 and supply chain network, which included select facility consolidations. The program encompassed the transition of our China chocolate and SGM operations into a united Golden Hershey platform, including the integrationcash portion of the China sales force,total program charges was $105,130. The Company reduced its global workforce by approximately 15% as well as workforce planning efforts anda result of this program, with a majority of the consolidationreductions coming from hourly headcount positions outside of production within certain facilities in China and North America. the United States.
For the three and ninesix months ended SeptemberJune 28, 2020, we recognized total costs associated with the Margin for Growth Program of $1,275 and $2,170, respectively. For the three and six months ended June 30, 2018,2019, we recognized total costs associated with the Margin for Growth Program of $6,378 and $6,862, respectively. These charges included employee severance, largely relating to initiatives to improve the cost structure of our corporate operating model as part of optimizing our global supply chain. In addition, we incurred pre-taxother program costs, totaling $1,077 and $2,813, respectively, relatingwhich related primarily to third-party charges in support of our initiative to optimize our productionimprove global efficiency and supply chain network. In addition, we completed the sale of select China facilities that had been taken out of service in connection with the 2016 Operational Optimization Program. The sale resulted in a gain of $6,562 for the three and nine months ended September 30, 2018. This program was completed in 2018.effectiveness.
10. INCOME TAXES
The majority of our taxable income is generated in the U.S.United States and taxed at the U.S. statutory rate of 21%. The effective tax rates for the ninesix months ended September 29,June 28, 2020 and June 30, 2019 were 19.8% and September 30, 2018 were 19.2% and 21.3%18.7%, respectively. Relative to the statutory rate, the 20192020 effective tax rate was impacted by a change to foreign valuation allowances,investment tax credits and the benefit of ASU 2016-09 for accounting of employee share-based payment, and investment tax credits, which werepayments, partially offset by state taxes.
Hershey and its subsidiaries file tax returns in the U.S.,United States, including various state and local returns, and in other foreign jurisdictions.  We believe adequate provision has been made for all income tax uncertainties. We are routinely audited by taxing authorities in our filing jurisdictions, and a number of these audits are currently underway.underway, including multi-year audits at various stages of review in Malaysia, Mexico and the United States. The outcome of tax audits cannot be predicted with certainty, including the timing of resolution or potential settlements. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Based on our current assessments, we believe adequate provision has been made for all income tax uncertainties. We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $5,026$3,353 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits.
U.S. Tax Cuts and Jobs Act of 2017

The U.S. Tax Cuts and Jobs Act, enacted in December 2017 (“U.S. tax reform”), significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries.  Under GAAP (specifically, ASC Topic 740), the effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted.Hershey Company | Q2 2020 Form 10-Q | Page 21
During the fourth quarter of 2017, we recorded a net provisional charge of $32.5 million, which included the estimated impact of the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries offset in part by the benefit from revaluation of net deferred tax liabilities based on the new lower corporate income tax rate. During 2018, we recorded net benefits totaling $19.5 million as measurement period adjustments to the net provisional charge. The accounting for income tax effects of U.S. tax reform is complete based on additional tax regulations available as of December 31, 2018.


25

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


Coronavirus Aid, Relief, and Economic Security Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on our consolidated financial statements for the three and six months ended June 28, 2020.
11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Net Periodic Benefit Cost
The components of net periodic benefit cost for the three months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018 were as follows:  
  Pension BenefitsOther Benefits
  Three Months Ended Three Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Service cost $5,209
 $5,272
 $39
 $56
Interest cost 9,153
 7,487
 1,958
 1,730
Expected return on plan assets (13,494) (14,455) 
 
Amortization of prior service (credit) cost (1,808) (1,804) 203
 209
Amortization of net loss (gain) 8,421
 6,784
 (96) 
Settlement loss 4,817
 6,893
 
 
Total net periodic benefit cost $12,298
 $10,177
 $2,104
 $1,995


Pension BenefitsOther Benefits
Three Months EndedThree Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Service cost$5,411  $5,210  $41  $37  
Interest cost6,966  9,150  1,505  1,959  
Expected return on plan assets(13,142) (13,493) —  —  
Amortization of prior service (credit) cost(1,824) (1,808) 75  203  
Amortization of net loss (gain)6,582  8,421  (10) (96) 
Settlement loss3,653  —  —  —  
Total net periodic benefit cost$7,646  $7,480  $1,611  $2,103  
We made contributions of $901$248 and $4,039$3,976 to the pension plans and other benefits plans, respectively, during the thirdsecond quarter of 2019.2020. In the thirdsecond quarter of 2018,2019, we made contributions of $6,350$272 and $6,276$3,986 to our pension plans and other benefit plans, respectively. The contributions in 20192020 and 20182019 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.
The components of net periodic benefit cost for the ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018 were as follows:  
Pension BenefitsOther Benefits
Six Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Service cost$10,843  $10,417  $80  $75  
Interest cost13,956  18,306  3,012  3,918  
Expected return on plan assets(26,310) (26,989) —  —  
Amortization of prior service (credit) cost(3,651) (3,617) 150  406  
Amortization of net loss (gain)13,164  16,841  (19) (192) 
Settlement loss3,653  —  —  —  
Total net periodic benefit cost$11,655  $14,958  $3,223  $4,207  
  Pension BenefitsOther Benefits
  Nine Months Ended Nine Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Service cost $15,626
 $15,931
 $114
 $172
Interest cost 27,459
 23,153
 5,876
 5,194
Expected return on plan assets (40,483) (43,973) 
 
Amortization of prior service (credit) cost (5,425) (5,402) 609
 627
Amortization of net loss (gain) 25,262
 20,155
 (288) 
Settlement loss 4,817
 6,893
 
 
Total net periodic benefit cost $27,256
 $16,757
 $6,311
 $5,993


We made contributions of $2,071$1,005 and $11,788$7,328 to the pension plans and other benefits plans, respectively, during the first ninesix months of 2019.2020. In the first ninesix months of 2018,2019, we made contributions of $7,651$1,170 and $19,054$7,749 to our pension plans and other benefit plans, respectively. The contributions in 20192020 and 20182019 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.

The non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 18).


The Hershey Company | Q2 2020 Form 10-Q | Page 22

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

During the thirdsecond quarter of 2019,2020, we recognized pension settlement charges in our hourly retirement plan due to lump sum withdrawals by employees retiring or leaving the Company as a result of the Margin for Growth Program.
During the third quarter of 2018, we recognized pension settlement charges in our hourly retirement plan due to lump
sum withdrawals by employees retiring or leaving the Company as a result of the Operational Optimization Program
and due to lump sum distributions in our supplemental executive retirement plan. In each case, theThe non-cash settlement charges, which represent the acceleration of a portion of the respective plan’s accumulated unrecognized actuarial loss, were triggered when the cumulative lump sum distributions exceeded the plan's anticipated annual service and interest


26

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

costs. In connection with the thirdsecond quarter 20192020 settlements, the related plan assets and liabilities were remeasured using a discount rate as of the remeasurement date that was 11169 basis points lower than the rate as of December 31, 20182019 and an expected rate of return on plan assets of 6.0%5.3%.
12. STOCK COMPENSATION PLANS
We have variousShare-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 programs under which awards including stock options, performance stock units (“PSUs”) and performance stock, stock appreciation rights, restricted stock units (“RSUs”) and restricted stock may be granted to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent. These programsdependent:
Non-qualified stock options ("stock options");
Performance stock units ("PSUs") and performance stock;
Stock appreciation rights;
Restricted stock units ("RSUs") and restricted stock; and
Other stock-based awards.
The EICP also provides for the accounting treatment related theretodeferral 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 describedexercised or PSUs and RSUs 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 paid on our Common Stock. Dividend equivalents are charged to retained earnings and included in Note 10accrued liabilities until paid.
Awards to employees eligible for retirement prior to the Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K.award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. In addition, historical data is used to estimate forfeiture rates and record share-based compensation expense only for those awards that are expected to vest.
For the periods presented, compensation expense for all types of stock-based compensation programs and the related income tax benefit recognized were as follows:
  Three Months Ended Nine Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Pre-tax compensation expense $15,867
 $12,122
 $39,579
 $35,668
Related income tax benefit 5,317
 2,808
 7,639
 7,776

Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Pre-tax compensation expense$12,915  $13,156  $25,490  $23,712  
Related income tax benefit2,492  2,160  4,894  4,482  
Compensation costsexpenses for stock compensation plans are primarily included in selling, marketing and administrative expense. As of September 29, 2019,June 28, 2020, total stock-based compensation costexpense related to non-vested awards not yet recognized was $72,334$71,898 and the weighted-average period over which this amount is expected to be recognized was approximately 2.1 years.
Stock Options
A summaryThe exercise price of activity relating to grantseach stock option awarded under the EICP equals the closing price of stock options forour Common Stock on the period ended September 29, 2019 is as follows:
Stock OptionsSharesWeighted-Average
Exercise Price (per share)
Weighted-Average Remaining
Contractual Term
Aggregate Intrinsic Value
Outstanding at beginning of year5,394,382
$94.285.6 years 
Granted1,640
$109.74  
Exercised(2,774,973)$90.78  
Forfeited(67,876)$101.58  
Outstanding as of September 29, 20192,553,173
$97.896.0 years$142,704
Options exercisable as of September 29, 20191,492,037
$95.654.7 years$86,731

The weighted-average fair value of options granted was $15.25 and $15.57 per share for the periods ended September 29, 2019 and September 30, 2018, respectively. The fair value was estimatedNew York Stock Exchange on the date of grant usinggrant. Each stock option has a Black-Scholes option-pricing model and the following weighted-average assumptions:maximum term of 10 years. Grants of stock
  Nine Months Ended
  September 29, 2019 September 30, 2018
Dividend yields 2.7% 2.3%
Expected volatility 17.0% 16.6%
Risk-free interest rates 2.5% 2.8%
Expected term in years 6.5
 6.6

The total intrinsic value of options exercised was $110,304 and $26,006 for the periods ended September 29, 2019 and September 30, 2018, respectively.Hershey Company | Q2 2020 Form 10-Q | Page 23


27

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


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.
A summary of activity relating to grants of stock options for the period ended June 28, 2020 is as follows:
Stock OptionsSharesWeighted-Average
Exercise Price (per share)
Weighted-Average Remaining
Contractual Term
Aggregate Intrinsic Value
Outstanding at beginning of the period2,420,461  $97.805.7 years
Granted15,260  $157.32
Exercised(406,121) $93.17
Forfeited(39,181) $102.36
Outstanding as of June 28, 20201,990,419  $99.115.3 years$53,705  
Options exercisable as of June 28, 20201,533,325  $97.564.6 years$43,378  
The weighted-average fair value of options granted was $21.31 and $15.25 per share for the periods ended June 28, 2020 and June 30, 2019, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions:
Six Months Ended
June 28, 2020June 30, 2019
Dividend yields2.1 %2.7 %
Expected volatility17.5 %17.0 %
Risk-free interest rates1.3 %2.5 %
Expected term in years6.76.5
The total intrinsic value of options exercised was $23,597 and $67,117 for the periods ended June 28, 2020 and June 30, 2019, respectively.
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. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award.
For PSUs granted, the target award is a combination of a market-based total shareholder return and performance-based components. For market-based condition components, market volatility and other factors are taken into consideration in determining the grant date fair value and the related compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. For performance-based condition components, we estimate the probability that the performance conditions will be achieved each quarter and adjust compensation expenses accordingly. The performance scores of PSU grants during the six months ended June 28, 2020 and June 30, 2019 can range from 0% to 250% of the targeted amounts.
We recognize the compensation expenses associated with PSUs ratably over the 3-year term. Compensation expenses 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.
During the six months ended June 28, 2020 and June 30, 2019, we awarded RSUs to certain executive officers and other key employees under the EICP. We also awarded RSUs to non-employee directors.

The Hershey Company | Q2 2020 Form 10-Q | Page 24

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

We recognize the compensation expenses 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. The compensation expenses associated with non-employee director RSUs is recognized ratably over the vesting period, net of estimated forfeitures.
A summary of activity relating to grants of PSUs and RSUs for the period ended September 29, 2019June 28, 2020 is as follows:
Performance Stock Units and Restricted Stock UnitsNumber of unitsWeighted-average grant date fair value for equity awards (per unit)
Outstanding at beginning of year1,089,916  $112.52
Granted326,283  $163.30
Performance assumption change (1)(13,443) $110.27
Vested(276,924) $109.32
Forfeited(106,304) $119.00
Outstanding as of June 28, 20201,019,528  $131.88
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 478,145
 $115.29
Performance assumption change (1) 182,774
 $125.20
Vested (428,229) $98.85
Forfeited (74,453) $107.98
Outstanding as of September 29, 2019 1,157,255
 $112.06

(1)
Reflects the net number of PSUs above and below target levels based on the performance metrics.
(1)Reflects the net number of PSUs above and below target levels based on the performance metrics.
The following table sets forth information about the fair value of the PSUs and RSUs granted for potential future distribution to employees and non-employee directors. In addition, the table provides assumptions used to determine the fair value of the market-based total shareholder return component using the Monte Carlo simulation model on the date of grant.
Six Months Ended
June 28, 2020June 30, 2019
Units granted326,283  442,672  
Weighted-average fair value at date of grant$163.30  $113.71  
Monte Carlo simulation assumptions:
Estimated values$80.08  $48.40  
Dividend yields2.0 %2.6 %
Expected volatility17.3 %20.3 %
  Nine Months Ended
  September 29, 2019 September 30, 2018
Units granted 478,145
 435,096
Weighted-average fair value at date of grant $115.29
 $97.74
Monte Carlo simulation assumptions:    
Estimated values $48.40
 $29.17
Dividend yields 2.6% 2.6%
Expected volatility 20.3% 20.4%

The fair value of shares vested totaled $48,355$41,874 and $22,093$40,163 for the periods ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, respectively.
Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 337,224280,980 units as of September 29, 2019.June 28, 2020. Each unit is equivalent to 1 share of the Company’s Common Stock.
13. SEGMENT INFORMATION
Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international markets. Our business is 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 89%92% 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. - 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


28The Hershey Company | Q2 2020 Form 10-Q | Page 25

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


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-related costs 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.
As discussed in Note 5, derivatives used to manage commodity price risk are not designated for hedge accounting treatment. These derivatives are recognized at fair market value with the resulting realized and unrealized (gains) losses recognized in unallocated derivative (gains) losses outside of the reporting segment results until the related inventory is sold, at which time the related gains and losses are reallocated to segment income. This enables us to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.
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.
Our segment net sales and earnings were as follows:
  Three Months Ended Nine Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Net sales:        
North America $1,894,033
 $1,843,511
 $5,269,031
 $5,155,151
International and Other 240,389
 236,082
 649,096
 648,016
Total $2,134,422
 $2,079,593
 $5,918,127
 $5,803,167
         
Segment income:        
North America $570,388
 $556,060
 $1,606,047
 $1,534,345
International and Other 39,444
 31,072
 81,631
 65,379
Total segment income 609,832
 587,132
 1,687,678
 1,599,724
Unallocated corporate expense (1) 132,828
 116,474
 370,211
 361,447
Unallocated mark-to-market losses (gains) on commodity derivatives 12,138
 47,617
 (13,447) (69,464)
Long-lived asset impairment charges (see Note 6) 
 1,649
 4,741
 28,817
Costs associated with business realignment activities (see Note 9) 1,606
 11,423
 8,468
 42,670
Acquisition-related costs 2,445
 3,706
 7,951
 36,413
Gain on sale of licensing rights 
 
 
 (2,658)
Operating profit 460,815
 406,263
 1,309,754
 1,202,499
Interest expense, net 35,456
 36,916
 106,690
 101,207
Other (income) expense, net 17,999
 12,493
 36,601
 35,201
Income before income taxes $407,360
 $356,854
 $1,166,463
 $1,066,091

Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Net sales:
North America$1,583,787  $1,568,040  $3,428,608  $3,374,998  
International and Other123,542  199,177  316,038  408,707  
Total$1,707,329  $1,767,217  $3,744,646  $3,783,705  
Segment income (loss):
North America$497,587  $470,898  $1,079,142  $1,035,659  
International and Other(3,969) 21,944  12,035  42,187  
Total segment income493,618  492,842  1,091,177  1,077,846  
Unallocated corporate expense (1)106,883  125,205  231,450  242,889  
Unallocated mark-to-market losses (gains) on commodity derivatives487  (53,552) 82,241  (25,585) 
Long-lived asset impairment charges (see Note 6)
1,600  4,741  9,143  4,741  
Costs associated with business realignment activities (see Note 9)
1,275  6,378  2,170  6,862  
Operating profit383,373  410,070  766,173  848,939  
Interest expense, net (see Note 4)
38,079  33,776  74,334  71,234  
Other (income) expense, net (see Note 18)
11,217  13,125  22,750  18,602  
Income before income taxes$334,077  $363,169  $669,089  $759,103  

29The Hershey Company | Q2 2020 Form 10-Q | Page 26

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


(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, (d) acquisition-related costs, and (e) other gains or losses that are not integral to segment performance.
(1)Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance, and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, and (d) other gains or losses that are not integral to segment performance.
Activity within the unallocated mark-to-market losses (gains) onadjustment for commodity derivatives is as follows:

  Three Months Ended Nine Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in income $9,043
 $71,088
 $(19,847) $4,315
Net gains (losses) on commodity derivative positions reclassified from unallocated to segment income 3,095
 (23,471) 6,400
 (73,779)
Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses $12,138
 $47,617
 $(13,447) $(69,464)

Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in income$(2,624) $(55,531) $74,468  $(28,890) 
Net gains on commodity derivative positions reclassified from unallocated to segment income3,111  1,979  7,773  3,305  
Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains)$487  $(53,552) $82,241  $(25,585) 
As of September 29, 2019,June 28, 2020, the cumulative amount of mark-to-market gainslosses on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was $53,765.$13,274. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pretax gainslosses on commodity derivatives of $25,283$165 to segment operating results in the next twelve months.

Depreciation and amortization expense included within segment income presented above is as follows:
Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
North America$54,379  $55,137  $108,081  $109,082  
International and Other7,037  7,314  14,246  14,664  
Corporate10,484  9,566  20,197  20,600  
Total$71,900  $72,017  $142,524  $144,346  
 Three Months Ended Nine Months Ended
 September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
North America$56,895
 $52,066
 $165,977
 $152,237
International and Other7,202
 7,260
 21,866
 28,090
Corporate (1)10,398
 15,481
 30,998
 45,476
Total$74,495
 $74,807
 $218,841
 $225,803

(1)Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note 9. Such amounts are not included within our measure of segment income.
14. TREASURY STOCK ACTIVITY
A summary ofAdditional information regarding our treasury stock activitynet sales disaggregated by geographical region is as follows:
 Nine Months Ended September 29, 2019
 Shares Dollars
   In thousands
Shares repurchased in the open market under pre-approved share repurchase programs1,386,193
 $150,000
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation2,144,638
 295,870
Total share repurchases3,530,831
 445,870
Shares issued for stock options and incentive compensation(3,022,128) (125,751)
Net change508,703
 $320,119

Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Net sales:
United States$1,504,266  $1,493,283  $3,271,542  $3,221,543  
All other countries203,063  273,934  473,104  562,162  
Total$1,707,329  $1,767,217  $3,744,646  $3,783,705  
The $100,000 share repurchase program approved by our Board of Directors in October 2017 was completed in the first quarter of 2019. In July 2018, our Board of Directors approved an additional $500,000 share repurchase authorization, to commence after the existing 2017 authorization was completed. As of September 29, 2019, $410,000

The Hershey Company | Q2 2020 Form 10-Q | Page 27

30

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


The majority of our products are confectionery or confectionery-based and include chocolate and non-chocolate confectionery products, gum and mint refreshment products, spreads, snack bites and mixes, as well as pantry items such as baking ingredients, toppings and sundae syrups. Our snacks portfolio includes ready-to-eat popcorn, baked and trans fat free snacks, protein bars and other better-for-you snacks. Additional information regarding our net sales disaggregated by product line is as follows:
Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Net sales:
Confectionery and confectionery-based portfolio$1,592,181  $1,663,225  $3,500,415  $3,587,155  
Snacks portfolio115,148  103,992  244,231  196,550  
Total$1,707,329  $1,767,217  $3,744,646  $3,783,705  

14. TREASURY STOCK ACTIVITY
A summary of our treasury stock activity is as follows:
Six Months Ended June 28, 2020
SharesDollars
In thousands
Shares repurchased in the open market under pre-approved share repurchase programs951,138  $150,000  
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation450,000  61,196  
Total share repurchases1,401,138  211,196  
Shares issued for stock options and incentive compensation(554,074) (23,056) 
Net change847,064  $188,140  
In July 2018, our Board of Directors approved a $500,000 share repurchase authorization to repurchase shares of our Common Stock. As of June 28, 2020, $260,000 remained available for repurchases of our Common Stock under this program. We are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The program has no expiration date and acquired shares of Common Stock will be held as treasury shares. Purchases under approved share repurchase authorizations are in addition to our practice of buying back shares sufficient to offset those issued under incentive compensation plans.


The Hershey Company | Q2 2020 Form 10-Q | Page 28

THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
15. NONCONTROLLING INTEREST

Noncontrolling Interest in Subsidiary
We currently own a 50% controlling interest in Lotte Shanghai Foods Co., Ltd. (“LSFC”),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 20192020 activity relating to the noncontrolling interest follows:
Noncontrolling Interest
Balance, December 31, 2019$5,772 
Net loss attributable to noncontrolling interest(3,213)
Other comprehensive loss - foreign currency translation adjustments(75)
Balance, June 28, 2020$2,484 
The 2020 net loss attributable to the noncontrolling interest reflects the 50% allocation of LSFC-related business realignment and impairment costs (see
 Noncontrolling Interest
Balance, December 31, 2018$8,545
Net loss attributable to noncontrolling interest(171)
Other comprehensive income - foreign currency translation adjustments55
Balance, September 29, 2019$8,429

Note 9
).
16. CONTINGENCIES
We are subject to various pending or threatened legal proceedings and claims that arise in the ordinary course of our business. While it is not feasible to predict or determine the outcome of such proceedings and claims with certainty, in our opinion these matters, both individually and in the aggregate, are not expected to have a material effect on our financial condition, results of operations or cash flows.
17. EARNINGS PER SHARE
We compute basic earnings per share for Common Stock and Class B common stock using the two-class method. The Class B common stock is convertible into Common Stock on a share-for-share basis at any time. 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.


31The Hershey Company | Q2 2020 Form 10-Q | Page 29

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


We compute basic and diluted earnings per share based on the weighted-average number of shares of Common Stock and Class B common stock outstanding as follows:
 Three Months EndedThree Months Ended
 September 29, 2019 September 30, 2018June 28, 2020June 30, 2019
 Common Stock Class B Common Stock Common Stock Class B Common StockCommon StockClass B Common StockCommon StockClass B Common Stock
Basic earnings per share:        Basic earnings per share:
Numerator:        Numerator:
Allocation of distributed earnings (cash dividends paid) $115,176
 $42,551
 $107,532
 $39,767
Allocation of distributed earnings (cash dividends paid)$113,925  $42,551  $109,258  $39,762  
Allocation of undistributed earnings 122,424
 45,156
 85,019
 31,395
Allocation of undistributed earnings81,891  30,534  119,616  44,204  
Total earnings—basic $237,600
 $87,707
 $192,551
 $71,162
Total earnings—basic$195,816  $73,085  $228,874  $83,966  
        
Denominator (shares in thousands):        Denominator (shares in thousands):
Total weighted-average shares—basic 149,239
 60,614
 149,155
 60,620
Total weighted-average shares—basic147,635  60,614  149,025  60,614  
        
Earnings Per Share—basic $1.59
 $1.45
 $1.29
 $1.17
Earnings Per Share—basic$1.33  $1.21  $1.54  $1.39  
        
Diluted earnings per share:        Diluted earnings per share:
Numerator:        Numerator:
Allocation of total earnings used in basic computation $237,600
 $87,707
 $192,551
 $71,162
Allocation of total earnings used in basic computation$195,816  $73,085  $228,874  $83,966  
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock 87,707
 
 71,162
 
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock73,085  —  83,966  —  
Reallocation of undistributed earnings 
 (320) 
 (139)Reallocation of undistributed earnings—  (123) —  (254) 
Total earnings—diluted $325,307
 $87,387
 $263,713
 $71,023
Total earnings—diluted$268,901  $72,962  $312,840  $83,712  
        
Denominator (shares in thousands):        Denominator (shares in thousands):
Number of shares used in basic computation 149,239
 60,614
 149,155
 60,620
Number of shares used in basic computation147,635  60,614  149,025  60,614  
Weighted-average effect of dilutive securities:        Weighted-average effect of dilutive securities:
Conversion of Class B common stock to Common shares outstanding 60,614
 
 60,620
 
Conversion of Class B common stock to Common shares outstanding60,614  —  60,614  —  
Employee stock options 949
 
 589
 
Employee stock options521  —  817  —  
Performance and restricted stock units 510
 
 317
 
Performance and restricted stock units300  —  361  —  
Total weighted-average shares—diluted 211,312
 60,614
 210,681
 60,620
Total weighted-average shares—diluted209,070  60,614  210,817  60,614  
        
Earnings Per Share—diluted $1.54
 $1.44
 $1.25
 $1.17
Earnings Per Share—diluted$1.29  $1.20  $1.48  $1.38  

There were no antidilutive stock options for the three months ended September 29, 2019. The earnings per share calculations for the three months ended SeptemberJune 28, 2020 and June 30, 20182019 excluded 4,08415 and 47 stock options (in thousands), respectively, that would have been antidilutive.


The Hershey Company | Q2 2020 Form 10-Q | Page 30
32

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

We compute basic and diluted earnings per share based on the weighted-average number of shares of Common Stock and Class B common stock outstanding as follows:
  Nine Months Ended
  September 29, 2019 September 30, 2018
  Common Stock Class B Common Stock Common Stock Class B Common Stock
Basic earnings per share:        
Numerator:        
Allocation of distributed earnings (cash dividends paid) $331,134
 $122,076
 $303,152
 $112,026
Allocation of undistributed earnings 357,259
 132,036
 310,942
 114,651
Total earnings—basic $688,393
 $254,112
 $614,094
 $226,677
         
Denominator (shares in thousands):        
Total weighted-average shares—basic 148,989
 60,614
 149,371
 60,620
         
Earnings Per Share—basic $4.62
 $4.19
 $4.11
 $3.74
         
Diluted earnings per share:        
Numerator:        
Allocation of total earnings used in basic computation $688,393
 $254,112
 $614,094
 $226,677
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock 254,112
 
 226,677
 
Reallocation of undistributed earnings 
 (781) 
 (547)
Total earnings—diluted $942,505
 $253,331
 $840,771
 $226,130
         
Denominator (shares in thousands):        
Number of shares used in basic computation 148,989
 60,614
 149,371
 60,620
Weighted-average effect of dilutive securities:        
Conversion of Class B common stock to Common shares outstanding 60,614
 
 60,620
 
Employee stock options 783
 
 664
 
Performance and restricted stock units 431
 
 315
 
Total weighted-average shares—diluted 210,817
 60,614
 210,970
 60,620
         
Earnings Per Share—diluted $4.47
 $4.18
 $3.99
 $3.73

Six Months Ended
June 28, 2020June 30, 2019
Common StockClass B Common StockCommon StockClass B Common Stock
Basic earnings per share:
Numerator:
Allocation of distributed earnings (cash dividends paid)$229,177  $85,102  $215,958  $79,525  
Allocation of undistributed earnings164,541  61,218  234,836  86,879  
Total earnings—basic$393,718  $146,320  $450,794  $166,404  
Denominator (shares in thousands):
Total weighted-average shares—basic147,954  60,614  148,864  60,614  
Earnings Per Share—basic$2.66  $2.41  $3.03  $2.75  
Diluted earnings per share:
Numerator:
Allocation of total earnings used in basic computation$393,718  $146,320  $450,794  $166,404  
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock146,320  —  166,404  —  
Reallocation of undistributed earnings—  (309) —  (462) 
Total earnings—diluted$540,038  $146,011  $617,198  $165,942  
Denominator (shares in thousands):
Number of shares used in basic computation147,954  60,614  148,864  60,614  
Weighted-average effect of dilutive securities:
Conversion of Class B common stock to Common shares outstanding60,614  —  60,614  —  
Employee stock options620  —  699  —  
Performance and restricted stock units408  —  391  —  
Total weighted-average shares—diluted209,596  60,614  210,568  60,614  
Earnings Per Share—diluted$2.58  $2.41  $2.93  $2.74  
The earnings per share calculations for the ninesix months ended September 29,June 28, 2020 and June 30, 2019 excluded 15 and September 30, 2018 excluded 1,476 and 4,196 stock options (in thousands), respectively, that would have been antidilutive.



33The Hershey Company | Q2 2020 Form 10-Q | Page 31

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


18. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net reports certain gains and losses associated with activities not directly related to our core operations. A summary of the components of other (income) expense, net is as follows:
  Three Months Ended Nine Months Ended
  September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
Write-down of equity investments in partnerships qualifying for tax credits $8,779
 $3,303
 $18,564
 $23,067
Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans 9,154
 6,843
 17,827
 6,647
Other (income) expense, net 66
 2,347
 210
 5,487
Total $17,999
 $12,493
 $36,601
 $35,201


Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
Write-down of equity investments in partnership qualifying for historic tax credits (see Note 10)
$7,447  $8,633  $18,550  $9,785  
Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans (see Note 11)
3,806  4,336  3,955  8,673  
Other (income) expense, net(36) 156  245  144  
Total$11,217  $13,125  $22,750  $18,602  


34The Hershey Company | Q2 2020 Form 10-Q | Page 32

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


19. SUPPLEMENTAL BALANCE SHEET INFORMATION
The components of certain Consolidated Balance Sheet accounts are as follows:
June 28, 2020December 31, 2019
Inventories:
Raw materials$347,999  $271,125  
Goods in process132,235  98,842  
Finished goods694,351  614,698  
Inventories at FIFO1,174,585  984,665  
Adjustment to LIFO(175,205) (169,414) 
Total inventories$999,380  $815,251  
Prepaid expenses and other:
Prepaid expenses$40,816  $84,058  
Other current assets157,019  156,022  
Total prepaid expenses and other$197,835  $240,080  
Property, plant and equipment:
Land$106,745  $105,627  
Buildings1,300,667  1,298,985  
Machinery and equipment3,143,217  3,120,003  
Construction in progress254,041  209,788  
Property, plant and equipment, gross4,804,670  4,734,403  
Accumulated depreciation(2,639,324) (2,581,264) 
Property, plant and equipment, net$2,165,346  $2,153,139  
Other assets:
Capitalized software, net$168,187  $153,842  
Operating lease ROU assets222,854  220,678  
Other non-current assets133,646  137,480  
Total other assets$524,687  $512,000  
Accrued liabilities:
Payroll, compensation and benefits$160,864  $230,518  
Advertising, promotion and product allowances272,984  279,440  
Operating lease liabilities31,234  29,209  
Other178,856  163,205  
Total accrued liabilities$643,938  $702,372  
Other long-term liabilities:
Post-retirement benefits liabilities$206,382  $211,206  
Pension benefits liabilities60,579  58,773  
Operating lease liabilities184,626  184,163  
Other192,260  201,635  
Total other long-term liabilities$643,847  $655,777  
Accumulated other comprehensive loss:
Foreign currency translation adjustments$(131,922) $(83,704) 
Pension and post-retirement benefit plans, net of tax(191,352) (189,187) 
Cash flow hedges, net of tax(43,919) (51,075) 
Total accumulated other comprehensive loss$(367,193) $(323,966) 
  September 29, 2019 December 31, 2018
Inventories:    
Raw materials $280,865
 $237,086
Goods in process 121,335
 107,139
Finished goods 738,798
 618,798
Inventories at FIFO 1,140,998
 963,023
Adjustment to LIFO (171,927) (178,144)
Total inventories $969,071
 $784,879
     
Prepaid expenses and other:    
Prepaid expenses $62,964
 $68,490
Assets held for sale 23,339
 23,421
Other current assets 167,827
 180,248
Total prepaid expenses and other $254,130
 $272,159
     
Property, plant and equipment:    
Land $104,266
 $102,074
Buildings 1,256,046
 1,211,011
Machinery and equipment 3,094,087
 2,988,027
Construction in progress 197,899
 280,559
Property, plant and equipment, gross 4,652,298
 4,581,671
Accumulated depreciation (2,552,313) (2,451,377)
Property, plant and equipment, net $2,099,985
 $2,130,294
     
Other assets:    
Capitalized software, net $143,890
 $126,379
Operating lease ROU assets 225,959
 
Other non-current assets 154,474
 126,605
Total other assets $524,323
 $252,984
     
Accrued liabilities:    
Payroll, compensation and benefits $178,678
 $180,546
Advertising, promotion and product allowances 321,826
 286,028
Operating lease liabilities 28,967
 
Liabilities held for sale 376
 596
Other 196,497
 211,993
Total accrued liabilities $726,344
 $679,163
     
Other long-term liabilities:    
Post-retirement benefits liabilities $189,712
 $195,166
Pension benefits liabilities 61,702
 66,379
Operating lease liabilities 188,961
 
Other 187,467
 184,503
Total other long-term liabilities $627,842
 $446,048
     
Accumulated other comprehensive loss:    
Foreign currency translation adjustments $(93,258) $(96,678)
Pension and post-retirement benefit plans, net of tax (179,034) (205,230)
Cash flow hedges, net of tax (51,849) (54,872)
Total accumulated other comprehensive loss $(324,141) $(356,780)



The Hershey Company | Q2 2020 Form 10-Q | Page 33
35



Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis (“MD&A”) is intended to provide an understanding of Hershey's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Unaudited Consolidated Financial Statements and accompanying notes. This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Refer to the Safe Harbor Statement below as well as the Risk Factors and other information contained in our 20182019 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2020, and our Current Report on Form 8-K filed May 27, 2020.
for information concerning the key risks to achieving future performance goals.
The MD&A is organized in the following sections:
OVERVIEW
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 9085 countries worldwide.
Our principal product offeringsWe report our operations through two segments: North America and International and Other. The majority of our products are confectionery or confectionery-based and include chocolate and non-chocolate confectionery products;products, gum and mint refreshment products;products, spreads, snack bites and mixes, as well as pantry items such as baking ingredients, toppings and beverages;sundae syrups. The confectionery and snack items suchconfectionery-based portfolio is predominantly sold under the renowned brands of Hershey's, Reese's and Kisses, as spreads, meatwell as Kit Kat®, Jolly Rancher, Ice Breakers, Twizzlers, Heath, Payday, Cadbury and a variety of other popular brands. Our snacks barsportfolio includes ready-to-eat popcorn, baked and snack bites and mixes, popcorn andtrans fat free snacks, protein bars and cookies.
Business Acquisitions
In September 2019, we completedother better-for-you snacks. The snacks portfolio is predominantly sold under the acquisitionbrands of ONE Brands, LLC ("ONE Brands"), previously a privately held company that sells proprietary nutritional supplement products to retailers and distributors in the United States, with the ONE BarSkinnyPop as its primary product. ONE Brands is expected to generate annualized net sales of approximately $100 million and complements our existing snacking businesses acquired in 2018.
In October 2018, we completed the acquisition of Pirate Brands, which includes the, Pirate's Booty, Smart PuffsONE Bar, Paqui and Original Tings Oatmegabrands, from B&G.
Divestitures
During the second quarter of 2020, we completed the divestitures of KRAVE Pure Foods, Inc. Pirate Brands offers baked, trans fat free("Krave") and gluten free snacksthe Scharffen Berger and is availableDagoba brands. Total proceeds from the divestitures and the impact on our Consolidated Statements of Income, both individually and on an aggregate basis, were immaterial.
TRENDS AFFECTING OUR BUSINESS
On March 11, 2020, the World Health Organization designated the recent novel coronavirus ("COVID-19") as a global pandemic. COVID-19 was first detected in a wide rangeWuhan City, Hubei Province, China and continued to spread, significantly impacting various markets around the world, including the United States. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19.

Local, state and national governments continue to emphasize the importance of food distribution channelssupply during this pandemic and asked that food manufacturers and retailers remain open to meet the needs of our communities. Employee safety is our first priority, and as a result, we put preparedness plans in place at our manufacturing facilities. Our manufacturing facilities are currently open, however, we have adjusted shift schedules, enforced social distancing, increased sanitation and adjusted time and attendance policies for worker absenteeism. Our sales teams continue to support

The Hershey Company | Q2 2020 Form 10-Q | Page 34


community food supplies, while adhering to social distancing guidelines, implementing flexible hours, reducing person-to-person interaction and increasing safety measures. Additionally, in June, the Company re-opened Hershey’s Chocolate World stores in the United States.States (3 locations) and Niagara Falls (Ontario) on a limited capacity basis with increased safety measures and enforced social distancing. The Company's Chocolate World store in Singapore remains temporarily closed.

Also in June, we commenced a phased in approach to reopen our corporate headquarters in Hershey, Pennsylvania and other select offices with increased safety protocols. We have successfully onboarded several teams, however, occupancy levels remain low as we continue to monitor the latest COVID-19 related public health and government guidance. As a result, a majority of our office-based employees continue to work remotely where possible. We have crisis management teams in place to monitor the continually evolving situation and recommending risk mitigation actions as deemed necessary. To date, there has been minimal disruption to our supply chain network, including the supply of our ingredients, packaging or other sourced materials, though it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world. We are also working closely with our business units, contract manufacturers, distributors, contractors and other external business partners to minimize the potential impact on our business.

We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Our most recent liquidity measures include an increase in our short-term commercial paper balances and the $1 billion Notes issuance in May 2020 with varying rates ranging from 0.900% to 2.650% and maturity dates ranging from 2025 to 2050. Additionally, we continue to limit discretionary spending across the organization and re-prioritizing our capital projects amid the COVID-19 pandemic. We plan to move forward with our new global enterprise resource planning (“ERP”) system implementation and supply chain capacity projects, as these investments are of strategic importance to our long-term growth. However, as previously announced, we did selectively pause certain aspects of the ERP system implementation due to resource constraints and challenges associated with the critical design phase during these uncertain times. We expect this to delay our overall ERP implementation by approximately one year.

In January 2018,As a result of shelter-in-place restrictions that were implemented in late March and early April, as well as decreases in retail foot traffic and volatility in consumer shopping and consumption behavior across several areas of our portfolio, we completedexperienced a reduction in our net sales and income during the acquisition of all ofthree and six months ended June 28, 2020. The unfavorable impacts predominantly related to our International and Other segment (see Segment Results included in this MD&A). We believe the outstanding shares of Amplify Snack Brands, Inc. ("Amplify"), a publicly traded company basedfinancial impacts from COVID-19 are temporary in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPopOatmega nature and Paqui. The acquisition enables us to capture more consumer snacking occasions by creating a broader portfolio of brands.do not significantly affect our business model and growth strategy.

In late May and early June, many state governments began a phased reopening of their economies. These phased approaches promote limited food service offerings, outdoor dining, increased travel and the reopening of retailing establishments while adhering to new guidelines and enhanced safety measures, including social distancing and face mask protocols. However, certain states have paused or reversed plans to reopen their economies as new cases of COVID-19 have been on the rise in recent weeks. Based on the length and severity of COVID-19, we may experience continued volatility in retail foot traffic, consumer shopping and consumption behavior. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources.

36The Hershey Company | Q2 2020 Form 10-Q | Page 35




CONSOLIDATED RESULTS OF OPERATIONS

 Three Months Ended Percent Nine Months Ended PercentThree Months EndedSix Months Ended
 September 29, 2019 September 30, 2018 Change September 29, 2019 September 30, 2018 ChangeJune 28, 2020June 30, 2019Percent ChangeJune 28, 2020June 30, 2019Percent Change
In millions of dollars except per share amounts            In millions of dollars except per share amounts
Net Sales $2,134.4
 $2,079.6
 2.6 % $5,918.1
 $5,803.2
 2.0 %Net Sales$1,707.3  $1,767.2  (3.4)%$3,744.6  $3,783.7  (1.0)%
Cost of Sales 1,191.1
 1,216.1
 (2.1)% 3,207.6
 3,172.2
 1.1 %Cost of Sales914.8  892.5  2.5 %2,085.5  2,016.5  3.4 %
Gross Profit 943.3
 863.5
 9.2 % 2,710.5
 2,631.0
 3.0 %Gross Profit792.5  874.7  (9.4)%1,659.1  1,767.2  (6.1)%
Gross Margin 44.2% 41.5%   45.8% 45.3%  Gross Margin46.4 %49.5 %44.3 %46.7 %
SM&A Expense 481.4
 453.9
 6.0 % 1,388.7
 1,388.8
  %SM&A Expense408.9  453.8  (9.9)%884.3  907.4  (2.5)%
SM&A Expense as a percent of net sales 22.6% 21.8%   23.5% 23.9%  SM&A Expense as a percent of net sales24.0 %25.7 %23.6 %24.0 %
Long-Lived Asset Impairment Charges 
 1.6
 NM
 4.7
 28.8
 (83.5)%Long-Lived Asset Impairment Charges1.6  4.7  (66.3)%9.1  4.7  92.8 %
Business Realignment Costs 1.1
 1.7
 (31.3)% 7.3
 10.9
 (32.4)%
Business Realignment (Benefits) CostsBusiness Realignment (Benefits) Costs(1.4) 6.1  (122.3)%(0.5) 6.2  (107.7)%
Operating Profit 460.8
 406.3
 13.4 % 1,309.8
 1,202.5
 8.9 %Operating Profit383.4  410.1  (6.5)%766.2  848.9  (9.7)%
Operating Profit Margin 21.6% 19.5%   22.1% 20.7%  Operating Profit Margin22.5 %23.2 %20.5 %22.4 %
Interest Expense, Net 35.5
 37.0
 (4.0)% 106.7
 101.2
 5.4 %Interest Expense, Net38.1  33.8  12.7 %74.3  71.2  4.4 %
Other (Income) Expense, Net 18.0
 12.5
 44.1 % 36.6
 35.2
 4.0 %Other (Income) Expense, Net11.2  13.1  (14.5)%22.8  18.6  22.3 %
Provision for Income Taxes 82.1
 91.4
 (10.1)% 224.2
 226.6
 (1.1)%Provision for Income Taxes66.1  50.0  32.3 %132.3  141.9  (6.8)%
Effective Income Tax Rate 20.2% 25.6%   19.2% 21.3%  Effective Income Tax Rate19.8 %13.7 %19.8 %18.7 %
Net Income Including Noncontrolling Interest 325.2
 265.4
 22.5 % 942.3
 839.5
 12.3 %Net Income Including Noncontrolling Interest268.0  313.2  (14.4)%536.8  617.2  (13.0)%
Less: Net (Loss) Income Attributable to Noncontrolling Interest (0.1) 1.7
 (107.4)% (0.2) (1.3) (87.0)%Less: Net (Loss) Income Attributable to Noncontrolling Interest(0.9) 0.4  (299.3)%(3.2) —  NM
Net Income Attributable to The Hershey Company $325.3
 $263.7
 23.4 % $942.5
 $840.8
 12.1 %Net Income Attributable to The Hershey Company$268.9  $312.8  (14.0)%$540.0  $617.2  (12.5)%
Net Income Per Share—Diluted $1.54
 $1.25
 23.2 % $4.47
 $3.99
 12.0 %Net Income Per Share—Diluted$1.29  $1.48  (12.8)%$2.58  $2.93  (11.9)%
            
Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above.
NM = not meaningful.
NOTE: Percentage changes may not compute directly as shown due to rounding of amounts presented above.NOTE: Percentage changes may not compute directly as shown due to rounding of amounts presented above.
NM = not meaningfulNM = not meaningful

Results of Operations - ThirdSecond Quarter 20192020 vs. ThirdSecond Quarter 20182019
Net Sales
Net sales increased 2.6%decreased 3.4% in the thirdsecond quarter of 20192020 compared to the same period of 2018,2019, reflecting a favorable price realizationvolume decrease of 1.1%7.0% due to higher pricesthe impact of COVID-19 on sales in our international markets, as well as declines in owned retail and world travel retail and elasticity-driven impacts due to price increases on certain products, a benefit from net acquisitions and divestitures of 1.2% and a volume increase of 0.5%, partially offset by an unfavorable impact from foreign currency exchange rates of 0.2%0.7%. Excluding foreign currency, our third quarter 2019 net sales increased 2.8%. Consolidated volumes increasedThese decreases were partially offset by favorable price realization of 3.5% due to solid marketplace growth in select international markets.higher prices on certain products and a 0.8% benefit from net acquisitions and divestitures (predominantly driven by the 2019 acquisition of ONE Brands, LLC ("ONE Brands"), partially offset by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands).
Key U.S. Marketplace Metrics
For the thirdsecond quarter of 2019,2020, our total U.S. retail takeaway including Amplify, increased 1.5%4.1% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items. Our U.S. candy, mint and gum ("CMG") consumer takeaway increased 2.2%3.2%, resulting in a CMG market share gain of approximately 17227 basis points.
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,


The Hershey Company | Q2 2020 Form 10-Q | Page 36
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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.
Cost of Sales and Gross Margin
Cost of sales decreased 2.1%increased 2.5% in the thirdsecond quarter of 20192020 compared to the same period of 2018.2019. The decreaseincrease was driven by an incremental $62.0$52.9 million favorable impact fromof unfavorable mark-to-market adjustmentsactivity on our commodity derivative instruments, which are intended to economically hedge future years' commodity purchases, as well as favorable supply chain productivity.purchases. Additionally, the increase in cost of sales was attributed to higher freight and logistics costs, and additional plant costs, specifically, personal protective equipment ("PPE") costs, increased sanitation and wage incentives associated with COVID-19. These drivers were partially offset by higher freight and logistics costs and higher plant costs.favorable supply chain productivity.
Gross margin increaseddecreased by 270310 basis points in the thirdsecond quarter of 20192020 compared to the same period of 2018.2019. The increasedecrease was primarily due to favorablean unfavorable year-over-year mark-to-market impact from commodity derivative instruments, higher supply chain productivity, price realization,freight and favorable product mix.logistics costs and additional plant costs. These factors were partially offset by higher freightfavorable price realization and logistic costs.supply chain productivity.
Selling, Marketing and Administrative
Selling, marketing and administrative (“SM&A”) expenses increased $27.4decreased $44.8 million or 6.0%9.9% in the thirdsecond quarter of 2019.2020. Total advertising and related consumer marketing expenses increased 10.5%decreased 14.0% driven by advertising increasesmedia cost efficiencies and select brand investment optimization related to COVID-19 in both the North America. Selling, marketingAmerica and administrativeInternational and Other segments. SM&A expenses, excluding advertising and related consumer marketing, increaseddecreased approximately 3.5%7.6% in the thirdsecond quarter of 2020 primarily due to increased spendingsavings in travel and meeting expenses as a result of COVID-19 related to personnel-related costs.travel restrictions and lower incentive compensation.
Long-Lived Asset Impairment Charges

There were noDuring the second quarter of 2020, we recorded impairment charges of $1.6 million to adjust long-lived asset impairment chargesvalues in connection with our disposal group classified as held for sale, as discussed in Note8 to the thirdUnaudited Consolidated Financial Statements. 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 during 2020. During the second quarter of 2019. In the third quarter of 2018,2019, we recorded long-lived asset impairment charges of $1.6$4.7 million, associated withwhich were predominantly comprised of select land that had not yet met the Shanghai Golden Monkey ("SGM") and Tyrrells disposal groups. These charges represent the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts that were realized upon completion of the sales, over the sales values less costs to sellheld for the respective businesses.sale criteria.
Business Realignment Activities
InBusiness realignment benefits of $1.4 million in the thirdsecond quarter of 2019 and 2018, we recorded business realignment2020 versus costs of $1.1$6.1 million and $1.7 million, respectively. The costsin the second quarter of 2019 related primarily to the Margin for Growth Program, which is discussed in more detail in Note 9 to the Unaudited Consolidated Financial Statements.
Operating Profit and Operating Profit Margin
Operating profit increased 13.4%decreased 6.5% in the thirdsecond quarter of 20192020 compared to the same period of 20182019 due primarily to higherlower gross profit, lower long-lived asset impairment charges, and lower business realignment costs, partially offset by higherlower SM&A in the 2019 period,expenses, as noted above. Operating profit margin increaseddecreased to 21.6%22.5% in 20192020 from 19.5%23.2% in 20182019 driven by these same factors.
Interest Expense, Net
Net interest expense was $1.5$4.3 million lowerhigher in the thirdsecond quarter of 20192020 compared to the same period of 2018.2019. The decreaseincrease was primarily due to lower interest payments associated with lowerincome in 2020 as we recognized a benefit in 2019 related to an international local tax settlement, as well as higher long-term debt balances including commercial paper.in 2020 versus 2019 (predominantly due to $1.0 billion of notes issued in October 2019).
Other (Income) Expense, Net
Other (income) expense, net totaled expense of $18.0$11.2 million in the thirdsecond quarter of 20192020 versus expense of $12.5$13.1 million in the thirdsecond quarter of 2018.2019. The increasedecrease in the net expense was primarily due to higherlower write-downs on equity investments qualifying for federal historic and energy tax credits and higherlower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2019.

2020.

38The Hershey Company | Q2 2020 Form 10-Q | Page 37



Income Taxes and Effective Tax Rate
Our effective income tax rate was 20.2%19.8% for the thirdsecond quarter of 20192020 compared with 25.6%13.7% for the thirdsecond quarter of 2018.2019. Relative to the U.S.21% statutory rate, of 21%, the 2020 effective tax rate benefited from investment tax credits and changes in tax reserves, partially offset by state taxes. The 2019 effective tax rate, relative to the 21% statutory rate, was impacted by a change to foreign valuation allowances, the benefit of ASU 2016-09 for accounting of employee share-based paymentpayments, and investment tax credits, which were partially offset by state taxes.
Net Income attributable to The Hershey Company and Earnings Per Share-diluted
Net income increased $61.6decreased $45.2 million, or 23.4%14.0%, while EPS-diluted increased $0.29,decreased $0.19, or 23.2%12.8%, in the thirdsecond quarter of 20192020 compared to the same period of 2018.2019. The increasedecrease in both net income and EPS-diluted was driven primarily by higher operatinglower gross profit and lowerhigher income taxes, partially offset by lower SM&A expenses, as noted above. Our 2020 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.

Results of Operations - First NineSix Months 20192020 vs. First NineSix Months 20182019
Net Sales
Net sales increased 2.0%decreased 1.0% in the first ninesix months of 20192020 compared to the same period of 2018,2019, reflecting a favorable price realizationvolume decrease of 1.2%4.5% due to higher pricesthe impact of COVID-19 on sales in our international markets, as well as declines in owned retail and world travel retail and elasticity-driven impacts due to price increases on certain products, a volume increase of 0.6% and a 0.5% benefit from net acquisitions and divestitures, partially offset byan unfavorable impact from foreign currency exchange rates of 0.3%0.4%. Excluding foreign currency, our first nine monthsThese decreases were partially offset by a favorable price realization of 2019 net sales increased 2.3%. Consolidated volumes increased3.1% due to solid marketplace growth in select international markets.higher prices on certain products and a 0.8% benefit from net acquisitions and divestitures (predominantly driven by the 2019 acquisition of ONE Brands, partially offset by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands).
Cost of Sales and Gross Margin
Cost of sales increased 1.1%3.4% in the first ninesix months of 20192020 compared to the same period of 2018.2019. The increase was driven by higher freight and logistics costs and higher plant costs. These drivers were partially offset by a $24.2an incremental $103.4 million favorable impact fromof unfavorable mark-to-market adjustmentsactivity on our commodity derivative instruments. These derivative instruments are intended to economically hedge future years' commodity purchases, as well ashowever, they were significantly impacted by financial market volatility during the first six months of 2020. Additionally, the increase in cost of sales was attributed to higher freight and logistics costs and additional plant costs, specifically, PPE costs, increased sanitation and wage incentives associated with COVID-19. These drivers were partially offset by favorable supply chain productivity.
Gross margin increaseddecreased by 50240 basis points in in the first ninesix months of 20192020 compared to the same period of 2018.2019. The increasedecrease was primarily due to favorableunfavorable year-over-year mark-to-market impact from commodity derivative instruments, the higher supply chain productivity, favorable product mixfreight and favorable volume.logistics costs and additional plant costs. These factors were partially offset by higher freightfavorable price realization and logistic costs.supply chain productivity.
Selling, Marketing and Administrative
SM&A expenses remained fairly comparable decreasing $0.1decreased $23.0 million or 2.5% in the first ninesix months of 2019.2020. Total advertising and related consumer marketing expenses increased 5.0%decreased 4.5% driven by advertising increasesmedia cost efficiencies and select brand investment optimization related to COVID-19 in both the North America. Selling, marketingAmerica and administrativeInternational and Other segments. SM&A expenses, excluding advertising and related consumer marketing, decreased approximately 2.7%1.4% in the first ninesix months of 20192020 primarily due to less spending from the Margin for Growth Programsavings in travel and lower acquisition-related costs.meeting expenses as a result of COVID-19 related travel restrictions.


The Hershey Company | Q2 2020 Form 10-Q | Page 38


Long-Lived Asset Impairment Charges
During the first ninesix months of 2020, we recorded the following impairment charges:
In millions of dollars
Adjustment to disposal group (1)$6.2 
Other asset write-down (2)2.9 
Long-lived asset impairment charges$9.1 
(1)In connection with our disposal group classified as held for sale, as discussed in Note 8 to the Unaudited Consolidated Financial Statements, during the first six months of 2020, 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 during 2020.
(2)In connection with a previous sale, the Company wrote-down certain receivables deemed uncollectible.

During the first six months of 2019, we recorded long-lived asset impairment charges of $4.7 million, which are were
predominantly comprised of select land that hashad not yet met the held for sale criteria. During the first nine months of 2018, we recorded long-lived asset impairment charges of $28.8 million associated with the SGM and Tyrrells disposal groups. These charges represented the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts to be realized upon completion of the sales, over the estimated fair values less costs to sell for the respective businesses. In July 2018, we sold the SGM and Tyrrells businesses.
Business Realignment Activities
InBusiness realignment benefits of $0.5 million in the first ninesix months of 2019 and 2018, we recorded business realignment2020 versus costs of $7.3$6.2 million and $10.9 million, respectively. The costsin the first six months of 2019 related primarily to the Margin for Growth Program, which is discussed in more detail in Note 9 to the Unaudited Consolidated Financial Statements.


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Operating Profit and Operating Profit Margin
Operating profit increased 8.9%decreased 9.7% in the first ninesix months of 20192020 compared to the same period of 20182019 due primarily to higherlower gross profit, partially offset by lower long-lived asset impairment charges, and lower business realignment cost in the 2019 period,SM&A expenses, as noted above. Operating profit margin increaseddecreased to 22.1%20.5% in the first nine months of2020 from 22.4% in 2019 from 20.7% in the first nine months of 2018 driven by these same factors.
Interest Expense, Net
Net interest expense was $5.5$3.1 million higher in the first ninesix months of 20192020 compared to the same period of 2018.2019. The increase was primarily due to lower interest income in 2020 as we recognized a benefit in 2019 related to an international local tax settlement, as well as higher average long-term debt balancebalances in 2020 versus 2019 verses 2018.(predominantly due to $1.0 billion of notes issued in October 2019).
Other (Income) Expense, Net
Other (income) expense, net totaled expense of $36.6$22.8 million in the first ninesix months of 20192020 versus expense of $35.2$18.6 million in the first ninesix months of 2018.2019. The increase in the net expense was primarily due to higher write-downs on equity investments qualifying for federal historic and energy tax credits, partially offset by lower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2019, partially offset by lower write-downs on equity investments qualifying for federal historic and energy tax credits.2020.
Income Taxes and Effective Tax Rate
Our effective income tax rate was 19.2%19.8% for the first ninesix months of 20192020 compared with 21.3%18.7% for the first ninesix months of 2018.2019. Relative to the U.S.21% statutory rate, the 2020 effective tax rate was favorably impacted by investment tax credits and the benefit of 21%, theemployee share-based payments, partially offset by state taxes. The 2019 effective tax rate, relative to the 21% statutory rate, was impacted by a change to foreign valuation allowances, the benefit of ASU 2016-09 for accounting of employee share-based payment,payments, and investment tax credits, which were partially offset by state taxes.
Net Income attributable to The Hershey Company and Earnings Per Share-diluted
Net income increased $101.7decreased $77.2 million, or 12.1%12.5%, while EPS-diluted increased $0.48,decreased $0.35, or 12.0%11.9%, in the first ninesix months of 20192020 compared to the same period of 2018.2019. The increasedecrease in both net income and EPS-diluted was driven primarily by higher operatinglower gross profit, which was partlypartially offset by higher interest expense,lower SM&A expenses and lower taxes. Our 2020 EPS-diluted also benefited from lower weighted-average shares outstanding as noted above.a result of share repurchases pursuant to our Board-approved repurchase programs.

The Hershey Company | Q2 2020 Form 10-Q | Page 39


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-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations.


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Our segment results, including a reconciliation to our consolidated results, were as follows:
Three Months EndedSix Months Ended
June 28, 2020June 30, 2019June 28, 2020June 30, 2019
In millions of dollars
Net Sales:
North America$1,583.8  $1,568.0  $3,428.6  $3,375.0  
International and Other123.5  199.2  316.0  408.7  
Total$1,707.3  $1,767.2  $3,744.6  $3,783.7  
Segment Income (Loss):
North America$497.6  $470.9  $1,079.1  $1,035.7  
International and Other(4.0) 21.9  12.0  42.2  
Total segment income493.6  492.8  1,091.1  1,077.9  
Unallocated corporate expense (1)106.9  125.2  231.4  242.9  
Unallocated mark-to-market losses (gains) on commodity derivatives (2)0.5  (53.6) 82.2  (25.6) 
Long-lived asset impairment charges1.6  4.7  9.1  4.7  
Costs associated with business realignment activities1.3  6.4  2.2  6.9  
Operating profit383.3  410.1  766.2  849.0  
Interest expense, net38.1  33.8  74.3  71.2  
Other (income) expense, net11.2  13.1  22.8  18.6  
Income before income taxes$334.0  $363.2  $669.1  $759.2  
   Three Months Ended Nine Months Ended
   September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
In millions of dollars         
Net Sales:        
North America $1,894.0
 $1,843.5
 $5,269.0
 $5,155.2
International and Other 240.4
 236.1
 649.1
 648.0
Total $2,134.4
 $2,079.6
 $5,918.1
 $5,803.2
         
Segment Income:        
North America $570.4
 $556.1
 $1,606.0
 $1,534.3
International and Other 39.4
 31.1
 81.6
 65.4
Total segment income 609.8
 587.2
 1,687.6
 1,599.7
Unallocated corporate expense (1) 132.8
 116.5
 370.2
 361.4
Unallocated mark-to-market losses (gains) on commodity derivatives (2) 12.1
 47.6
 (13.4) (69.5)
Long-lived asset impairment charges 
 1.6
 4.7
 28.8
Costs associated with business realignment activities 1.6
 11.4
 8.4
 42.7
Acquisition-related costs 2.4
 3.7
 7.9
 36.5
Gain on sale of licensing rights 
 
 
 (2.7)
Operating profit 460.9
 406.4
 1,309.8
 1,202.5
Interest expense, net 35.5
 37.0
 106.7
 101.2
Other (income) expense, net 18.0
 12.5
 36.6
 35.2
Income before income taxes $407.4
 $356.9
 $1,166.5
 $1,066.1
(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, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.
(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 losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains). See Note 13 to the Unaudited Consolidated Financial Statements.
(2)Net losses (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains). See Note 13 to the Unaudited Consolidated Financial Statements.


41The Hershey Company | Q2 2020 Form 10-Q | Page 40



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 results, which accounted for 88.7%92.8% and 88.6%88.7% of our net sales for the three months ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, respectively, were as follows:
 Three Months Ended Percent Nine Months Ended PercentThree Months EndedPercentSix Months EndedPercent
 September 29, 2019 September 30, 2018 Change September 29, 2019 September 30, 2018 ChangeJune 28, 2020June 30, 2019ChangeJune 28, 2020June 30, 2019Change
In millions of dollars            In millions of dollars
Net sales $1,894.0
 $1,843.5
 2.7% $5,269.0
 $5,155.2
 2.2%Net sales$1,583.8  $1,568.0  1.0 %$3,428.6  $3,375.0  1.6 %
Segment income 570.4
 556.1
 2.6% 1,606.0
 1,534.3
 4.7%Segment income497.6  470.9  5.7 %1,079.1  1,035.7  4.2 %
Segment margin 30.1% 30.2%   30.5% 29.8%  Segment margin31.4 %30.0 %31.5 %30.7 %
Results of Operations - ThirdSecond Quarter 20192020 vs. ThirdSecond Quarter 20182019
Net sales of our North America segment increased $50.5$15.8 million or 2.7%1.0% in the thirdsecond quarter of 20192020 compared to the same period in 2018,of 2019, reflecting a favorable price realization of 1.5%4.2% attributed to higher prices on certain products and decreased levels of trade promotional spending compared to prior year, as well as a 0.8% benefit from net acquisitions and divestitures (predominantly driven by the 2019 acquisition of ONE Brands, partially offset by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands). These increases were partially offset by a volume decrease of 3.8%, which was primarily elasticity-driven due to the aforementioned price increases and COVID-19 related impacts to the business, as well as unfavorable foreign currency exchange rates of 0.2%.
Our North America segment income increased $26.7 million or 5.7% in the second quarter of 2020 compared to the same period of 2019, primarily due to favorable price realization, lower trade promotional spending and lower advertising and related consumer marketing expenses as a result of COVID-19, partially offset by higher supply chain-related costs, specifically, PPE costs, increased sanitation and wage incentives associated with COVID-19, as well as volume decreases.
Results of Operations - First Six Months 2020 vs. First Six Months 2019
Net sales of our North America segment increased $53.6 million or 1.6% in the first six months of 2020 compared to the same period of 2019, reflecting favorable price realization of 3.5% attributed to higher prices on certain products and a 0.9% benefit from net impact of acquisitions and divestitures (predominantly driven by the 2019 acquisition of 1.5%ONE Brands, partially offset by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands). This wasThese increases were partially offset by a volume decrease of 0.2% largely2.7%, which was primarily elasticity-driven due to the introduction of new packaging formatsaforementioned price increases and anCOVID-19 related impacts to the business, as well as unfavorable impact from foreign currency exchange rates of 0.1%.
Our North America segment income increased $14.3$43.4 million or 2.6%4.2% in the third quarterfirst six months of 20192020 compared to the third quartersame period of 2018,2019, primarily due to favorable commodity costsprice realization, lower trade promotional spending and favorable price realization,lower advertising and related consumer marketing expenses as a result of COVID-19, partially offset by higher advertising expense, higher freight and logistics costs and higher supply chain-related costs.costs, specifically, PPE costs, increased sanitation and wage incentives associated with COVID-19, as well as volume decreases.
Results of Operations - First Nine Months 2019 vs. First Nine Months 2018
Net sales of our North America segment increased $113.8 million or 2.2% in the first nine months of 2019 compared to the first nine months of 2018, which includes a 1.0% benefit from net acquisitions and divestitures. Excluding the Amplify and Pirate Brands acquisitions and Tyrrells divestiture, our North America segment net sales increased 1.2%. Net price realization increased 1.4% attributed to higher prices on certain products. Volume was flat and foreign currency exchange rates resulted in an unfavorable impact of 0.2%.

Our North America segment income increased $71.7 million or 4.7% in the first nine months of 2019 compared to the first nine months of 2018, primarily due to favorable commodity costs, favorable price realization and favorable sales mix, partially offset by higher advertising expense, higher freight and logistics costs and higher supply chain-related costs.The Hershey Company | Q2 2020 Form 10-Q | Page 41


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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 Regional Markets, such as 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) 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 results, which accounted for 11.3%7.2% and 11.4%11.3% of our net sales for the three months ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, respectively, were as follows:
 Three Months Ended Percent Nine Months Ended PercentThree Months EndedPercentSix Months EndedPercent
 September 29, 2019 September 30, 2018 Change September 29, 2019 September 30, 2018 ChangeJune 28, 2020June 30, 2019ChangeJune 28, 2020June 30, 2019Change
In millions of dollars            In millions of dollars
Net sales $240.4
 $236.1
 1.8% $649.1
 $648.0
 0.2%Net sales$123.5  $199.2  (38.0)%$316.0  $408.7  (22.7)%
Segment income 39.4
 31.1
 26.7% 81.6
 65.4
 24.8%
Segment (loss) incomeSegment (loss) income(4.0) 21.9  (118.3)%12.0  42.2  (71.6)%
Segment margin 16.4% 13.2%   12.6% 10.1%  Segment margin(3.2)%11.0 %3.8 %10.3 %

Results of Operations - ThirdSecond Quarter 20192020 vs. ThirdSecond Quarter 20182019
Net sales of our International and Other segment increased $4.3decreased $75.7 million or 1.8%38.0% in the thirdsecond quarter of 20192020 compared to the same period in 2018,of 2019, reflecting a volume increasedecrease of 5.3%. This was partially offset by an unfavorable price realization of 1.6%31.3%, an unfavorable impact from foreign currency exchange rates of 1.0%4.6%, and a 0.9% reductionunfavorable price realization of 2.1%. The volume decrease was attributed to significant sales declines in our strategic focus markets, most notably Mexico, where net sales primarily fromdeclined by 54.5%, as well as reduced sales in our export markets, due to the divestitureimplementation of SGM. Excludingquarantine protocols by local governments to mitigate the divestiturespread of SGMCOVID-19.
Our International and unfavorable foreign currency exchange rates,Other segment also includes licensing, owned retail and world travel retail, where net sales declined approximately 51.0% during the second quarter of 2020 as the Company temporarily closed all Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore in March amid the COVID-19 pandemic. In June, the Company re-opened Hershey’s Chocolate World stores in the United States and Niagara Falls (Ontario) on a limited capacity basis with increased safety measures and enforced social distancing. The Company's Chocolate World store in Singapore remains temporarily closed.
Our International and Other segment generated losses of $4.0 million in the second quarter of 2020 compared to income of $21.9 million in the second quarter of 2019. This decrease was driven by the lower level of net sales associated with the COVID-19 disruption.
Results of Operations - First Six Months 2020 vs. First Six Months 2019
Net sales of our International and Other segment net sales increased 3.7%decreased $92.7 million or 22.7% in the first six months of 2020 compared to the same period of 2019, reflecting a volume decrease of 19.0%, an unfavorable impact from foreign currency exchange rates of 3.4%, and unfavorable price realization of 0.3%. The volume increasedecrease was primarily attributed to solid marketplace growthsignificant sales declines in Mexicoour strategic focus markets, most notably China and IndiaMexico, where net sales increaseddeclined by 5.8%41.4% and 16.2% 26.4%, respectively. The unfavorable net price realization was driven by increased levels of trade promotional spending comparedrespectively, as well as reduced sales in our export markets, due to the prior year.implementation of quarantine protocols by local governments to mitigate the spread of COVID-19.
Our International and Other segment also includes licensing, owned retail and world travel retail, where net sales declined approximately 31.5% during the first six months of 2020 as the Company temporarily closed all Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore in March amid the COVID-19 pandemic. In June, the Company re-opened Hershey’s Chocolate World stores in the United States and Niagara Falls (Ontario) on a limited capacity basis with increased safety measures and enforced social distancing. The Company's Chocolate World store in Singapore remains temporarily closed.

The Hershey Company | Q2 2020 Form 10-Q | Page 42


Our International and Other segment generated income of $39.4 million in the third quarter of 2019 compared to $31.1 million in the third quarter of 2018, with the improvement primarily resulting from our efforts to drive sustainable gross margin improvements as we executed our Margin for Growth program and optimized the product portfolio across various international markets. Additionally, segment income benefited from continued growth across Mexico and India.
Results of Operations - First Nine Months 2019 vs. First Nine Months 2018
Net sales of our International and Other segment increased $1.1 million or 0.2% in the first nine months of 2019 compared to the first nine months of 2018, reflecting a volume increase of 5.9%, partially offset by a 2.9% reduction in net sales primarily from the divestiture of SGM, an unfavorable impact from foreign currency exchange rates of 1.8%, and unfavorable price realization of 1.0%. Excluding the divestiture of SGM and unfavorable foreign currency exchange rates, our International and Other segment net sales increased 4.9%. The volume increase was primarily attributed to solid marketplace growth in Mexico, India and Regional Markets where net sales increased by 6.0%, 2.3% and 6.3%, 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 $81.6$12.0 million in the first ninesix months of 20192020 compared to $65.4$42.2 million in the first ninesix months of 2018,2019. This decrease was driven by the lower level of net sales associated with the improvement primarily resulting from our efforts to drive sustainable gross margin improvements as we executed our Margin for Growth program and optimized the product portfolio across various international markets. Additionally, segment income benefited from continued growth across Mexico, India and Regional Markets.


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COVID-19 disruption.
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.
In the thirdsecond quarter of 2019,2020, unallocated corporate expense totaled $132.8$106.9 million, as compared to $116.5$125.2 million in the thirdsecond quarter of 2018,2019, primarily driven by personnel-related costs.savings in travel and meeting expenses related to COVID-19 travel restrictions and lower incentive compensation. In the first ninesix months of 2019,2020, unallocated corporate expense totaled $370.2$231.4 million, as compared to $361.4$242.9 million in the same periodfirst six months of 2018,2019 primarily driven by personnel-related costs.savings in travel and meeting expenses related to COVID-19 travel restrictions.

The Hershey Company | Q2 2020 Form 10-Q | Page 43


LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary source of liquidity has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, are generally met by utilizing cash on hand, bank borrowings or the issuance of commercial paper. Commercial paper may also be issued, from time to time, to finance ongoing business transactions, such as the repayment of long-term debt, business acquisitions and for other general corporate purposes.
At September 29,June 28, 2020, our cash and cash equivalents totaled $1.2 billion. At December 31, 2019, our cash and cash equivalents totaled $302.6 million. At December 31, 2018, our cash and cash equivalents totaled $588.0$493.3 million. Our cash and cash equivalents during the first ninesix months of 2019 decreased $285.42020 increased $672.1 million compared to the 20182019 year-end balancebalance. This increase was predominantly due to our $1 billion Notes issuance in May 2020 as a resultwe intend to mitigate any potential COVID-19 risks, partially offset by the repayment of $350 million Notes that matured in May 2020. Additional detail regarding the net usessources of cash are outlined in the following discussion.
Approximately 85%30% of the balance of our cash and cash equivalents at September 29, 2019June 28, 2020 was held by subsidiaries domiciled outside of the United States. TheDuring the first six months of 2020, previously undistributed earnings of certain international subsidiaries were no longer considered indefinitely reinvested; however, the Company had previously recognized thea one-time U.S. repatriation tax due under U.S. tax reform, and as a result, repatriationonly an immaterial amount of these amounts would not be subjectwithholding tax was recognized. For the remainder of the Company’s cash held by international subsidiaries, we intend to additional U.S. federal income tax but would be subject to applicable withholding taxes in the relevant jurisdiction. Our intent iscontinue to reinvest funds earned outside of the United States to finance foreign operations and investments, and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.undistributed earnings indefinitely. We believe we have sufficient liquidity to satisfy our cash needs, including our cash needs in the United States.
Cash Flow Summary
The following table is derived from our Consolidated StatementStatements of Cash Flows:
 Nine Months EndedSix Months Ended
In millions of dollars September 29, 2019 September 30, 2018In millions of dollarsJune 28, 2020June 30, 2019
Net cash provided by (used in):    Net cash provided by (used in):
Operating activities $993.3
 $892.8
Operating activities$614.0  $679.3  
Investing activities (697.6) (972.2)Investing activities(209.8) (206.4) 
Financing activities (582.8) 529.0
Financing activities295.9  (698.7) 
Effect of exchange rate changes on cash and cash equivalents 1.7
 (6.0)Effect of exchange rate changes on cash and cash equivalents(17.3) 3.8  
(Decrease) increase in cash and cash equivalents $(285.4) $443.6
Less: Cash classified as assets held for sale (see Note 8)
Less: Cash classified as assets held for sale (see Note 8)
(10.7) —  
Increase (decrease) in cash and cash equivalentsIncrease (decrease) in cash and cash equivalents$672.1  $(222.0) 
Operating activities
We generated cash of $993.3$614.0 million forfrom operating activities in the first ninesix months of 2019, an increase2020, a decrease of $100.5$65.3 million compared to $892.8$679.3 million in the same period of 2018.2019. This increasedecrease in net cash fromprovided by operating activities was mainly driven by the following factors:
Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, impairment of long-lived assets,asset charges, a write-down of equity investments and other charges) resulted in $88.3$69.5 million of higherlower cash flow in 20192020 relative to 2018.2019.


44



Prepaid expenses and other current assets used cash of $3.5 million in 2019, compared to cash used of $59.1 million in 2018. This $55.6 million fluctuation was mainly driven by the timing of payments on commodity futures. We utilize commodity futures contracts to economically manage the risk of future price fluctuations associated with our purchase of raw materials.
Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities), which consumed cash of $307$201.9 million in 20192020 and $326$151.5 million in 2018.2019. This $19$50.4 million fluctuation was mainly driven by:by the following factor:
$110 million increase
$43.6 million decrease in cash provided by accounts payable and accrued liabilities, due to the timing of payments for trade-related and other accounts payables, as well as prior year spending necessary to settle certain accrued liabilities acquired in conjunction with the Amplify acquisition.
Partially offset by a $28 million increase in cash used by accounts receivable, primarily driven by an increase in sales of U.S. seasonal products, resulting in a higher investment in accounts receivable as of the 2019 quarter-end.
Partially offset by a $63 million increase in cash used by inventories, due to a higher year-over-year build up of inventories to satisfy upcoming seasonal and holiday core product requirements.
Cash contributions to our pension and post retirement plans totaled $13.9 million in 2019, a decrease in shorter term sales as well as timing of $12.8 millioncustomer payments, resulting in a slightly higher investment in accounts receivable at the end of the second quarter of 2020 compared to $26.7the same period of 2019.
$24.2 million increase in 2018. We contribute cash used by other assets and liabilities, primarily driven by the effect of commodity derivative activity in 2020 relative to our plans at our discretion, subject to applicable regulations and minimum contribution requirements.2019.

The increaseHershey Company | Q2 2020 Form 10-Q | Page 44



The decrease in cash provided by operating activities was partially offset by the following net cash outflow:inflow:
Incomes taxes generated $85.8 million less in cash flow in 2019 relative to 2018, mainly due to the variance in actual tax expense for 2019 relative to the timing of quarterly estimated tax payments.
Incomes taxes generated cash of $65.2 million in 2020, compared to cash used of $15.5 million in 2019. This $80.7 million fluctuation was primarily due to the deferral of quarterly estimated tax payments in 2020 as a result of the CARES Act. We paid income taxes of $71.6 million during 2020 compared to $136.9 million in the same period of 2019.

Investing activities
We used cash of $697.6$209.8 million for investing activities in the first ninesix months of 2019, a decrease2020, an increase of $274.6$3.4 million compared to $972.2$206.4 million in the same period of 2018.2019. This decreaseincrease in net cash used in investing activities was mainly driven by the following factors:
Capital spending. Capital expenditures, including capitalized software, primarily to support capacity expansion, innovation and cost savings, were $236.6 million in the first nine months of 2019 compared to $241.2 million in the same period of 2018. For full year 2019, we expect capital expenditures, including capitalized software, to approximate $350 million.
Proceeds from sales of property, plant and equipment and other long-lived assets. During the first nine months of 2019, proceeds from the sale of property, plant and equipment and other long-lived assets activity was minimal. During the first nine months of 2018, we generated $46.7 million of proceeds from the sale of property, plant and equipment and other long-lived assets. We sold 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. We had no divestiture activity in 2019. In July 2018, we sold the Tyrrells and SGM businesses. Collectively, the proceeds from the sales of these businesses, net of cash divested, were approximately $171.9 million. Further details are provided in Notes 6 and 8 to the Unaudited Consolidated Financial Statements.
Business Acquisitions. In September 2019, we acquired ONE Brands for $401.5 million. In January 2018, we acquired Amplify for $915.5 million, net of cash acquired. Further details regarding our business acquisition activity are provided in Note 2 to the Unaudited Consolidated Financial Statements.
Investments in partnerships qualifying for tax credits. We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested


45



approximately $52.7Capital spending. Capital expenditures, including capitalized software, primarily to support capacity expansion, innovation and cost savings, were $185.8 million in the first ninesix months of 2019,2020 compared to $34.2$176.3 million in the same period of 2018.
Other investing activities2019. For full year 2020, we expect capital expenditures, including capitalized software, to approximate $400 million to $450 million, as we continue to evaluate and re-prioritize our capital projects amid the COVID-19 pandemic.. During the first nine months of 2019, we made minority investments in emerging snacking businesses that qualify as cost method investments.
Financing activities
Investments in partnerships qualifying for tax credits. We used cash of $582.8make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested approximately $26.4 million for financing activities in the first ninesix months of 2019, an increase of $1,111.8 million2020, compared to cash generated of $529.0$30.3 million in the same period of 2018.2019.
Financing activities
We generated cash of $295.9 million from financing activities in the first six months of 2020, an increase of $994.6 million compared to cash used of $698.7 million in the same period of 2019. This increase in net cash used inprovided by financing activities was mainly driven by the following factors:
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. During the first nine months of 2019, we generated cash flow of $80.7 million through the issuance of short-term commercial paper, partially offset by a reduction in short-term foreign bank borrowings. During the first nine months of 2018, we generated cash flow of $893.4 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 repayment of 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.
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. During the first six months of 2020, we generated cash flow of $166.0 million predominantly through the issuance of short-term commercial paper, as well as an increase in short-term foreign bank borrowings. During the first six months of 2019, we had a net reduction in short-term borrowings of $311.2 million primarily due to repayments on commercial paper, partially offset by increases in short-term foreign borrowings.
Long-term debt borrowings and repayments.  During the first six months of 2020, we issued $300 million of 0.900% Notes due in 2025, $350 million of 1.700% Notes due in 2030 and $350 million of 2.650% Notes due in 2050 (the "2020 Notes"). Proceeds from the issuance of the 2020 Notes, net of discounts and issuance costs, totaled $989.9 million. Additionally, in May 2020, we repaid $350 million of 2.900% Notes due upon their maturity. During the first six months of 2019, our long-term debt borrowings and repayments activity was minimal.
Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $314.3 million during the first six months of 2020, an increase of $18.8 million compared to $295.5 million in the same period of 2019. Details regarding our 2020 cash dividends paid to stockholders are as follows:
Quarter Ended
In millions of dollars except per share amountsMarch 29, 2020June 28, 2020
Dividends paid per share – Common stock$0.773  $0.773  
Dividends paid per share – Class B common stock$0.702  $0.702  
Total cash dividends paid$157.8  $156.5  
Declaration dateJanuary 28, 2020April 21, 2020
Record dateFebruary 21, 2020May 22, 2020
Payment dateMarch 16, 2020June 15, 2020

The Hershey Company | Q2 2020 Form 10-Q | Page 45


Share repurchases. We used cash for total share repurchases of $211.2 million and $254.4 million during the first six months of 2020 and 2019, respectively, pursuant to our practice of replenishing shares issued for stock options and incentive compensation, as well as shares repurchased in the open market under pre-approved share repurchase programs.
Proceeds from the exercise of stock options, including tax benefits. We received $17.5 million from employee exercises of stock options, net of employee taxes withheld from share-based awards, during the first six months of 2020, a decrease of $143.9 million compared to $161.4 million in the same period of 2019.

Long-term debt borrowings and repayments. During the first nine months of 2019, our long-term debt borrowings and repayments activity was minimal. 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 August 2018, we repaid $300 million of 1.60% Notes due in 2018 upon their maturity. Additionally, in 2018, we repaid $607 million of debt assumed in connection with the Amplify acquisition, including all of the outstanding debt owed by Amplify under its existing credit agreement.
Tax receivable obligation. In connection with the Amplify acquisition in 2018, the Company agreed to make a payment to the counterparty of a tax receivable agreement. During the first nine months of 2018, we paid $72.0 million of the tax receivable obligation.
Share repurchases. We used cash for total share repurchases of $445.9 million and $199.7 million during the first nine months of 2019 and 2018, respectively, pursuant to our practice of replenishing shares issued for stock options and incentive compensation, as well as shares repurchased in the open market under pre-approved share repurchase programs.
Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $453.2 million during the first nine months of 2019, an increase of $38.0 million compared to $415.2 million in the same period of 2018.
Proceeds from the exercise of stock options. We received $235.3 million from employee exercises of stock options, net of employee taxes withheld from share-based awards, during the first nine months of 2019, an increase of $201.9 million compared to $33.4 million in the same period of 2018.
Recent Accounting Pronouncements
Information on recently adopted and recently issued accounting standards is included in Note 1 to the Unaudited Consolidated Financial Statements.


The Hershey Company | Q2 2020 Form 10-Q | Page 46




Safe Harbor Statement
We are subject to changing economic, competitive, regulatory and technological risks and uncertainties that could have a material impact on our business, financial condition or results of operations. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions that we have discussed directly or implied in this report. Many of the forward-looking statements contained in this report may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated,” and “potential,” among others.
The factors that could cause our actual results to differ materially from the results projected in our forward-looking statements include, but are not limited to the following:
IssuesOur Company’s reputation or brand image might be impacted as a result of issues or concerns relatedrelating to the quality and safety of our products, ingredients or packaging, human and workplace rights, and other environmental, social or governance matters, which in turn could cause a product recall and/or result in harm to the Company’s reputation, negatively impactingimpact our operating results;
Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results;
Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity;
Market demand for new and existing products could decline;
Increased marketplace competition could hurt our business;
Disruption to our manufacturing operations or supply chain could impair our ability to produce or deliver finished products, resulting in a negative impact on our operating results;
Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures;
Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products;
Political, economic and/or financial market conditions could negatively impact our financial results;
Our international operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations;
Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations;
We might not be able to hire, engage and retain the talented global workforce we need to drive our growth strategies;
We may not fully realize the expected costs savings and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business;
Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;
Our business and financial results may be negatively impacted by the failure to successfully manage a disruption in consumer and trade patterns, as well as operational challenges associated with the actual or perceived effects of a disease outbreak, including epidemics, pandemics or similar widespread public health concerns, such as the current COVID-19 global pandemic; and


The Hershey Company | Q2 2020 Form 10-Q | Page 47


Such other matters as discussed in our 20182019 Annual Report on Form 10-K.10-K, our Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2020, and our Current Report on Form 8-K filed May 27, 2020.
We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this Quarterly Report on Form 10-Q is filed.  



47



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The total notional amount of interest rate swaps outstanding at September 29, 2019June 28, 2020 and December 31, 20182019 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 September 29, 2019June 28, 2020 and December 31, 2018.2019. A hypothetical 100 basis point increase in interest rates applied to this now variable-rate debt as of September 29, 2019June 28, 2020 would have increased interest expense by approximately $2.7$1.8 million for the first ninesix months of 20192020 and $3.5 million for the full year 2018.2019.
In addition, the total amount of short-term debt, net of cash, amounted to $973net cash positions of $257 million and $610$461 million, respectively, at September 29, 2019June 28, 2020 and December 31, 2018.2019. A hypothetical 100 basis point increase in interest rates applied to this variable-rate short-term debt as of September 29, 2019June 28, 2020 would have increasedchanged interest expense by approximately $5.5$3.1 million for the first ninesix months of 20192020 and $9.0$4.3 million for the full year 2018.2019.
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 September 29, 2019June 28, 2020 and December 31, 20182019 by approximately $148$365 million and $121$246 million, respectively. However, since we currently have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position.
The potential decline in fair value of foreign currency forward exchange contracts resulting from a hypothetical near-term adverse change in market rates of 10% was $25.5$24.3 million as of September 29, 2019June 28, 2020 and $4.5$55.4 million as of December 31, 2018,2019, generally offset by a reduction in foreign exchange associated with our transactional activities.
Our open commodity derivative contracts had a notional value of $871.2$817.5 million as of September 29, 2019June 28, 2020 and $693.5$589.7 million as of December 31, 2018.2019. At the end of the thirdsecond quarter 2019,2020, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased our net unrealized losses by $87.1$74.8 million, generally offset by a reduction in the cost of the underlying commodity purchases.
Other than as described above, market risks have not changed significantly from those described in our 20182019 Annual Report on Form 10-K.


The Hershey Company | Q2 2020 Form 10-Q | Page 48



Item 4. CONTROLS AND PROCEDURES 
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 29, 2019.June 28, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 29, 2019.June 28, 2020.
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, which 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 implementation is expected to occur in phases over the next several years. We have completed the implementation of certain processes, including our consolidated financial reporting platform in the second quarter of 2018, as well as our trade promotions and direct marketing systems in the first quarter of 2019. These transitions did not result in significant changes in our internal control over financial reporting. However, as the next phases of the updated processes are rolled out in connection with the ERP implementation, we will give appropriate consideration to whether these process changes necessitate changes in the design of and testing for effectiveness of internal controls over financial reporting.
There have been no changes in our internal control over financial reporting during the quarter ended September 29, 2019June 28, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


The Hershey Company | Q2 2020 Form 10-Q | Page 49




PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Information on legal proceedings is included in Note 16 to the Unaudited Consolidated Financial Statements.
Item 1A. Risk Factors.
When evaluating an investment in our Common Stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our 20182019 Annual Report on Form 10-K, Part II, Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2020 (the “Q2 2020 Quarterly Report”), Item 8.01 of our Current Report on Form 8-K filed May 27, 2020 and the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements filed with the SEC. ThereExcept as described in our Q2 2020 Quarterly Report and our Current Report on Form 8-K filed on May 27, 2020, there have been no material changes with respect to the risk factors disclosed in our risk factors since the filing of our 20182019 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table shows the purchases of shares of Common Stock made by or on behalf of Hershey, or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of Hershey, for each fiscal month in the three months ended September 29, 2019:June 28, 2020:
Period  Total Number
of Shares
Purchased (1)
 Average Price
Paid
per Share
 Total Number of
Shares Purchased
as Part of Publicly
Announced Plans 
or Programs (2)
 Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs (2)
        (in thousands of dollars)
July 1 through July 28 256,333
 $139.28
 
 $410,000
July 29 through August 25 430,000
 $154.03
 
 $410,000
August 26 through September 29 575,000
 $155.66
 
 $410,000
Total 1,261,333
 $151.78
 
  
Period Total Number
of Shares
Purchased (1)
Average Price
Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly 
Announced Plans 
or Programs (2)Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs (2)
(in thousands of dollars)
March 30 through April 26285,000 $140.15 — $260,000 
April 27 through May 2415,000 $138.38 — $260,000 
May 25 through June 28— $— — $260,000 
Total300,000 $140.07 — 
(1) During the three months ended September 29, 2019, 1,261,333June 28, 2020, 300,000 shares of Common Stock were purchased in open market transactions in connection with our practice of buying back shares sufficient to offset those issued under incentive compensation plans.
(2) 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 additionala $500 million share repurchase authorization.  As of September 29, 2019,June 28, 2020, approximately $410$260 million remained available for repurchases of our Common Stock under this program. The share repurchase program does not have an expiration date.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.


The Hershey Company | Q2 2020 Form 10-Q | Page 50



Item 6. Exhibits.
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit NumberDescription
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
104The cover page from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2019,June 28, 2020, formatted in Inline XBRL and contained in Exhibit 101.
*Filed herewith
**Furnished herewith





The Hershey Company | Q2 2020 Form 10-Q | Page 51



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

THE HERSHEY COMPANY
 (Registrant)
Date:July 23, 2020THE HERSHEY COMPANY
 (Registrant)
Date:October 24, 2019/s/ Steven E. Voskuil
Steven E. Voskuil
Senior Vice President, Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer)
Date:October 24, 2019/s/ Javier H. Idrovo
Javier H. Idrovo
Chief Accounting Officer
(Principaland Accounting Officer)



The Hershey Company | Q2 2020 Form 10-Q | Page 52